Monthly Archives: September 2013


The most significant diplomacy surrounding the opening of this year’s UN General Assembly did not involve Syria but Iran. What was agreed with Tehran is potentially significant. Talks will focus on nuclear issues. The rationale was straightforward: if nuclear talks succeed, everything else is possible; if no nuclear deal is reached, nothing else will matter.

Also agreed is the basic structure of negotiations. The objective is to settle on the end-game, on what is often termed “final status” in peace talks. This will entail constraints on Iran’s nuclear capabilities along with arrangements for monitoring. In return, economic sanctions that are doing serious damage to Iran’s economy will be eased.


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Once there is agreement on an end-game, the sides will negotiate the pace and sequencing for getting there. Thus implementation will be step by step, but the parties will know what the final step will require before they take the first one.

It is also understood that while the formal mechanism for talks will be multilateral involving the permanent members of the UN Security Council, Germany and the EU, the real negotiations will be bilateral, between the US and Iran.

All this progress should not obscure the many differences that could well preclude success.

First, it would be difficult to exaggerate the fundamental mistrust. Iranians and Americans each have their own historical narratives: the former about the US-backed coup ousting the Mossadegh government in 1953, the latter the hostage ordeal in the wake of the 1979 revolution. More important, I have yet to encounter the US expert who believes that Iran’s nuclear programme is, as President Hassan Rouhani maintains, for peaceful – ie, energy-related – purposes, given that country’s enormous oil reserves.

Reinforcing this scepticism are statements by Mr Rouhani. In his address last week to the UN he said that “nuclear technology has already reached industrial scale”. Iran’s nuclear infrastructure (at least what we know of it) includes some 18,000 centrifuges, multiple enrichment sites, large amounts of uranium enriched to various levels and a new reactor that, once operational, could be a source of plutonium, a second path to a bomb.

In my two meetings with Mr Rouhani and his foreign minister, I heard flexibility on the possibility of giving up uranium already enriched to higher levels – but no going back to the day when Iran had only a small number of centrifuges. So it is far from clear that what will be enough for Iran in the way of nuclear capacity will not be too much for Israel or the US.

A third concern is political. It was not simply that the cautious Mr Rouhani was unwilling to shake hands with Barack Obama. It was also that Mr Obama’s UN address gave Iran quite a lot – no US desire for regime change; acceptance of Iran’s right to a peaceful nuclear programme – but Mr Rouhani offered little in return. Friday’s phone conversation between the two was therefore a symbolic as well as substantive development. There are doubts about Mr Rouhani’s ability to compromise even if he wants to. Much depends on Ayatollah Ali Khamenei, the supreme leader, who is, by definition, supreme.

Mr Obama has his own political challenges. Negotiating an accord with Iran that trades constraints on its nuclear programme in exchange for easing of sanctions will be tough. Gaining congressional approval could prove even tougher. There will be opposition from those who believe the US was too generous and trusting, and from those who seek regime or broader policy change.

We will know soon enough. Both sides are in a hurry. The new Iranian leaders worry that time is against them. They fear that conservatives defeated in the June elections will rally, while the public will grow impatient if the sanctions-battered economy does not improve.

Americans worry Iran is using time to get closer to creating an infrastructure able to produce fissile material, weaponise it and put warheads on missiles. Israeli officials do not hide their belief that under Mr Rouhani Iran will “smile its way to the bomb”.

All of which means this diplomatic dance will be no waltz. Sooner rather than later – certainly before next year is out – we should know if we will be toasting success or managing a crisis.

The writer is president of the Council on Foreign Relations

The main reason why the US Federal Reserve decided not to start tapering asset purchases at its last meeting was that the central bank considered the US economy to be still too fragile. The stock market nevertheless reacted with euphoria, jumping to new record levels.

The two facts are not easy to reconcile. The stock market rally should mean that investors are bullish about the earnings of the major listed companies, which should happen only if the US economy is on its way to a strong recovery, contrarily to the Fed’s forecast. If instead its view of the economy is correct, market prices are too high and are likely to be reversed downwards. In any case, asset prices do not seem to be in line with the central bank’s view of the US economy’s underlying fundamentals.

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There is hope that political developments in Iran and Syria will finally allow the western alliance a diplomatic way out of two terrible impasses.

The new Iranian regime, inundated and paralysed with sanctions, may finally be ready to discuss its nuclear programme and reach a compromise with the west, which would have to be sufficiently comprehensive to satisfy Israel too.

Syria’s agreement to surrender its chemical weapons to the UN may now allow a meaningful diplomatic effort to secure a ceasefire in the war between the government and the opposition and, further down the road, a tentative peace settlement.

However, whether such a settlement can save the country from disintegration is doubtful.

At the same time, other countries in the region are in a state of meltdown – and one overwhelming cause is sectarianism. Muslim leaders are offering no homegrown answers for the devastating effects on politics and society.

Crises are everywhere. In Iraq, there is a car bomb a day. The almost daily bombings of both Sunni and Shia mosques, and other mass sectarian killings, are taking the country back to the darkest days of 2006 and 2007, when violence was at a similar level to what it is today.

Al-Qaeda is busy bombing its way through the Shia heartland. Shia militias and state security services are taking revenge by carrying out what many now call “religious-ethnic cleansing”, whereby religious communities that have lived together for centuries are being ghettoised. Iraq may yet fall apart even as the war in Syria winds down.

Al-Qaeda is also on the offensive in Yemen, where dozens of soldiers were killed in a wave of attacks on September 20 in the southern province of Shabwa, despite regular US drone attacks and American support for the Yemeni army. Al-Qaeda continues to threaten a big attack on Yemen’s oil and gas terminals, which if carried out would send oil prices soaring.

Egypt, the linchpin of the Arab world, is facing a new guerrilla war by Islamists loyal to former President Mohamed Morsi, as well as rampant intolerance and a sectarian war against the Christian community. Lebanon is facing a crisis, with the arrival of Syrian refugees escaping the regime of President Bashar al-Assad; and the involvement of the Shia paramilitaries of Hizbollah on the side of Mr Assad’s forces. This dangerous double whammy is reigniting the fragile sectarian and ethnic balance in the country. Lebanon is a fuse waiting for a spark.

Jordan is simply overwhelmed with refugees and an economic crisis – all the result of the war in Syria – even as Amman is still trying to cope with its Iraqi refugees and fallout from the last war in the region. Jordan is the permanent victim. Turkey, once considered a role model for the Arab world on account of its democratic development, is now beset with its own widespread unrest and growing public disillusionment with its rulers. Its government has ceased to be a role model for many of its own citizens.

In the wider Muslim world, on Sunday September 22 alone, at least 78 Christians were killed and 150 wounded in a double suicide bombing carried out by Sunni extremists in Lahore, Pakistan; 12 Shia were killed by Sunni extremists in a suicide bombing in Iraq, following the killing of 70 Sunnis the day before. Meanwhile the death toll at the siege of the shopping mall in Nairobi, claimed by the jihadists of al-Shabaab, has exceeded 70.

The US and Europe are least prepared to deal with any implosion of these states in the near future. But what everyone, including the region’s Muslim rulers, are loath to touch is the growing destructive power of sectarianism. No ruler, politician, general or religious scholar in the wider region has had the courage to speak out openly against the killer disease of sectarianism that is tearing the heart out of the Islamic world.

The world centres of Islam and fatwas or religious edicts – al-Azhar in Egypt and the Great Mosques of Mecca, Medina and Jerusalem – are silent on the issue. Politicians hide their heads in the sand while allowing hate literature and sectarian militias to flourish. Blaming al-Qaeda and affiliated groups for the growth of Sunni extremism is not far off the mark but does not offer a total explanation.

The real issue is the lack of governance, institutions and values, along with state collapse and the failure of ruling elites to protect minorities, whether Shia or non-Muslim. The Arab uprising has not just overthrown dictatorship but also exposed the weaknesses of the foundations of the modern states built on the back of western colonialism.

Today’s Muslim leaders need to speak up and not fear the consequences of opposing what is fast becoming a war within Islam and the Arab world. No state can experience unrelenting extremism and intolerance year after year and not eventually face an internal collapse.

The origins of Islam go back to protecting minorities, providing an example of tolerance and treating all citizens, including women, as equal. Who on earth among the ruling elites remembers that today?

The writer is a best-selling author of several books about Afghanistan, Pakistan and Central Asia, most recently ‘Descent into Chaos’

Wladimir Balentien©AP

Imported talent: Wladimir Balentien

Baseball, America and Japan’s shared national pastime, is a useful window through which to view the two countries’ contrasting and changing attitudes to foreigners in general – and in the economy in particular.

Fans in the US have long embraced Japanese stars such as Ichiro Suzuki, the hit machine long with the Seattle Mariners; Hideki Matsui, the slugger beloved by the New York Yankees (and nicknamed Godzilla by fans); and Daisuke Matsuzaka, formerly of the Boston Red Sox, the thrower of the mythical gyroball pitch.


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Japan, conversely, has always been ambivalent about foreign-born stars. Robert Whiting wrote eloquently (and often hilariously) in You Gotta Have Wa about the cultural clashes and tensions that erupted in the 1970s, when American players started playing in greater numbers in Japan. A quota was imposed of no more than two on any team, mirroring some of the strategies used by Japanese trade negotiators when pressed from outside to open up their closed and protected markets.

Last week, however, the Japanese single-season home-run record, set by Sadaharu Oh in 1964, was surpassed by a journeyman former US Major League player, Wladimir Balentien of Tokyo’s Yakult Swallows.

Balentien’s accomplishment says a lot about important ways in which Japan is changing. Twice before, baseball imports – American “Tuffy” Rhodes in 2001 and Venezuelan Alex Cabrera in 2002 – had reached 55 home runs, tying with the sacred number achieved by Oh. But Japanese baseball conspired to avoid pitching to them, in order to avoid the indignity of a gaijin (foreign born) player surpassing their hero. The fact that an obscure overseas slugger has finally managed to hit a pitch out of the park and surpass Oh is a subtle but critical indicator that Japan is coming to see how competition from outside is both an essential and an inevitable feature of progress.

Balentien’s feat was greeted with some nationalist angst, which was probably to be expected, but it has also been hailed by baseball fans. Many attribute this to the influence of Ryozo Kato, the cosmopolitan outgoing commissioner of baseball (and former ambassador to the US), helping drive acceptance of global competition in the domestic game.

A similar dynamic is playing out in Japan on a larger, economic playing field. After many years of prevarication and outright refusal, Japan has decided to join the Trans-Pacific Partnership, the potentially precedent-setting trade negotiations now under way. Prime Minister Shinzo Abe decided to join the TPP in part to use it as an institutional crowbar to help open up cloistered sectors hitherto immune to political pressures – notably agriculture, financial services and carmaking.

In addition, Mr Abe has launched a series of unprecedented economic steps – his “three arrows” – designed to use fiscal outlays and inflationary steps to spur initial growth. The measures are also intended to usher in much-needed structural reforms in an attempt to overhaul the very foundations of Japanese commerce and industry.

As in baseball, there are nationalists in the economic debate arguing Japan can rebound on its own, without foreign participation. Some conservative legislators in Mr Abe’s Liberal Democratic party are falling back on zoku, or clan politics, which is profoundly distrustful of foreign companies and equity holders.

Mr Abe and his economic team will need to take clear steps to boost an approach to the national economy that embraces international competition and commercial participation inside Japan, rather than seeking to fence off foreigners from protected domestic markets. Such steps will need to reach beyond insurance, farming and carmaking to embrace crucial sectors such as software development, cloud computing and aviation.

Economic nationalism is sweeping across Asia, and Japan is by no means immune. But crucial policy makers and consumers alike have come to embrace overseas competition in an effort to reinvent Japan. The fact that the all-time home-run record, held for decades by the beloved Oh, is now held by an foreigner is a small indicator that the country is finally opening up, giving outsiders a chance to hit it out of the park.

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

by Laura Tyson and James Manyika

The Bureau of Economic Analysis recently announced that US output grew at an annualised rate of only 1.7 per cent during the second quarter of 2013. The figure was later revised upward – to 2.5 per cent – but there was something truly surprising about the reaction to the earlier, lower number. This sluggish performance was actually treated as good news.

The Great Recession, it seems, has put an end to great expectations for the US economy. As Washington remains gridlocked, business leaders, public officials, and commentators alike have begun to accept lackluster growth and depressed employment levels as the new normal. But the new normal may prove to be much more robust than anticipated. Continue reading »

Ed Miliband©FT

As the Labour party gathers for its conference in Brighton, its leader, Ed Miliband, faces a more aggressive Conservative party that is getting its act together. David Cameron’s strategists have launched what will be a relentless campaign to persuade voters that, despite all the pain and hardship of the austerity years, “hard-working families” can now enjoy lower income tax and a smaller public deficit with less welfare spending, crime and immigration. Labour’s task is to dispute these claims but, above all, offer better policies in their place.

Mr Miliband has laid important foundations for his campaign. He has recalibrated Labour’s position on public spending, welfare and immigration, aligning his approach with economic reality and popular opinion. He has ensured that Labour’s door remains open to working with the Liberal Democrats, despite the short-sighted attacks made by some in the party. Above all, he has not allowed his party its habitual descent into factional war following election defeat. With the quiescence of the New Labourites he disowned during his leadership campaign, the party has chosen to close ranks behind him.


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Local activists are likely to side with him in his bid to reform the party’s link with the trade unions – despite Mr Miliband’s not preparing the ground for this plan and confusing union leaders who had thought he shared their general outlook and are now wondering where he stands.

Assuming Mr Miliband gets his way on changing the union link – now a must-have for him – he still has work to do to persuade the voters to put him in Downing Street. This is not going to be achieved by “shouting louder” – as some in the shadow cabinet believe. It is content the voters want, not volume. Herein lies Mr Miliband’s dilemma.

Originally, he chose to define himself less as Ed Miliband and more as “not Tony Blair”. But he must now accentuate the positive rather than what he is not. And he must do this without forsaking those who backed him to become prime minister on an explicitly more leftwing agenda than New Labour’s.

The problem is that whereas during his leadership campaign this proposition seemed simple – after all, New Labour was defeated in 2010 – circumstances have changed. Not only have the public finances become even more straitened but voters have not turned against their fiscally disciplined, market friendly, centrist instincts in the ways that Team Miliband assumed would happen.

So Labour will need to cement a broad-based appeal if it is to win and govern. Relying on the backing of a left-leaning third of the electorate was never going to work. The Tories have done their homework on what appeals to the centre ground and Labour’s polling suggests the party has further to go to cater to these crucial voters.

It is not Mr Miliband’s character or moral fervour with which they have a problem. The public like his stand on phone-hacking and his focus on the “squeezed middle” and living standards – although they were less convinced by his tactics over Syria. But the electorate wants more. They want an analysis of how Mr Miliband sees the country’s needs and how Labour will differ from the coalition in meeting them. “One Nation” is a good line for a banner but needs an argument to support it and to set out an alternative. In 1997, our rallying cry was “Britain deserves better”. It is time to bring out a new, distinctive version of this election-winning argument.

In his speech on Tuesday, the main subject has to be the economy and how higher living standards can be delivered. He must define himself, above all, with workable long-term policies that make sense for business, investment and job creation, while recognising the importance of selective strategic state intervention. We must pump-prime the markets, technologies and innovation we need to succeed.

Labour also needs radicalism to improve health, education and other public services. We previously had money plus reform. In 2015 the party must offer reform with no more money. Mr Miliband also needs to signal how he will adapt Britain’s social welfare model to Britain’s changing demography and economy.

Mr Miliband’s team like to argue that they “have more policy than any other opposition in the history of modern politics”. The public has not noticed. Mr Miliband needs better communications support. Gone are the days when parliamentary lobby journalists held the key to a party’s image. Mr Miliband’s brand and message need to be recast for the age of social media, and he needs to show boldness and political artistry in grabbing his share of attention. This is best done arguing from clear principles and having the courage to stick by them.

As the next election approaches, Conservative claims about “the mess” they inherited and why “the keys shouldn’t be handed back to those who crashed the car” will sound tired. Even so, Labour needs to do far more to protect its record in government. The next election is open and all to play for. But if it is to be won by Labour, the campaign has to start firing on all cylinders soon – not in 18 months time.

The writer, formerly director of communications for Labour and business secretary, is chairman of Global Counsel


Letter in response to this article:

Labour must take on vested interests / From Mr Malcolm Levitt

With his pledge last year to do “whatever it takes” and the unveiling of the outright monetary transaction bond-buying programme, Mario Draghi and his colleagues at the European Central Bank saved the euro once. The Single Supervisory Mechanism, approved last week by the European Parliament, presents an opportunity to do it again – and this time for good. But the ECB president cannot do it alone. For investors to have confidence that the eurozone is finally on the path to stability, Europe’s politicians must support him with a credible and binding route to capital-raising for those eurozone banks that are viable but remain undercapitalised.

The SSM, which empowers the ECB to carry out banking supervision in the eurozone, is not some arcane piece of financial market infrastructure. Before taking banks under its supervision, the ECB will – in tandem with stress tests that the European Banking Authority is undertaking – conduct an asset quality review of eurozone banks. There are three reasons why, if done correctly, the AQR can be a potential game-changer, putting the eurozone crisis behind us.

First, it will ensure banks have sufficient capital to lend. In an economic area heavily dependent on banks to mediate between savers and borrowers, there can be no robust growth without the credit flows emanating from solidly capitalised banks. Any delay in tackling capital shortfalls will delay the European recovery, so desperately needed after years of severe austerity.

Second, a credible, tough and transparent health check of the European banking system, conducted by the most credible European institution on the basis of facts rather than politics, will be an important symbolic landmark in the necessary journey towards a more deeply integrated eurozone.

Third, the AQR will break the links between national politics and national banking systems, links that have aggravated and unnecessarily prolonged the eurozone crisis.

What has to happen for the AQR to be such a game-changer?

First and foremost, the reviews of the banks’ balance sheets have to be independent and tough, and seen to be so. Only then can they dispel uncertainty and cynicism over the true state of Europe’s banks. Crucially, the ECB must ensure that a template of transparency emerges from the AQR that allows investors truly to compare balance-sheet data across banks and across member states.

Moreover, the ECB will need a clear and credible path for dealing with any banks that fall short on capital. Ideally, balance sheets will be measured against fully loaded capital ratios as defined by Basel III global regulations, plus some additional buffer – perhaps another 2 per cent of risk-weighted assets – to deal with uncertainty about eurozone sovereign risk. No one can know in advance the extent to which capital shortfalls will be revealed. But current price-to-book ratios for European banks suggest a need for more capital in some cases.

Capital shortfalls will mean different things for different banks. Some may well turn out to be non-viable. Their licences will have to be revoked and they will need to be wound down. This will require an effective and broadly accepted Single Resolution Mechanism.

For those banks judged to be viable but overleveraged, the ECB will need to be able to direct them to raise more capital. Contrary to what is often heard from market participants, there is no reason to believe these banks will not be able to do so in the private market. Indeed, the process has already begun – since April, European banks have raised €14bn of new capital. Of course, existing shareholders will complain about dilution effects on their existing holdings. But the ECB should not be concerned about that. Properly incentivised, investors will want the banks to be robustly capitalised.

And this is where European politicians need to act to give the ECB the support it needs. Plans for dealing with banks that are viable but have not raised adequate capital privately need to be in place by the time the AQR is finalised in a year’s time. That is the only way in which the AQR will be seen to be credible.

That capital-raising can take one of two forms. In principle, European Commission state aid rules require bailing-in of banks’ junior bondholders to make good any capital shortfall identified by regulators. But exemptions are foreseen in cases where this would endanger financial stability. So, in addition, public funds need to be in place – at a European level, if necessary – to take equity stakes in banks on punitive terms for existing shareholders.

Either path to enforced recapitalisation will face resistance. In that sense, the game-changer cannot be bought for free. But there are two clear reasons for Mr Draghi to put his personal credibility, and that of his institution, to work to ensure Europe’s banks rebuild their capital. First, the alternative – a continued shortage of credit, leading to a Japanese-style decade of little or no growth – would be much more expensive for Europe’s citizens. Second, there is no reason why some degree of public recapitalisation, should that be the route taken, would entail significant losses for Europe’s taxpayers. As credit begins to flow again, and recovery becomes entrenched, there should over time be healthy returns on investing in Europe’s banks, assuming that the AQR has been done properly, and that public funds have been injected on sufficiently punitive terms.

As Mr Draghi made clear at the time, the OMTs, while necessary, could only buy time for eurozone policymakers to resolve the crisis. If the AQR is successful then, after a frustrating delay, policymakers will finally have addressed the challenges facing the banking system, and investors can at last be confident that Europe has begun to putits existential crisis of the past three years behind it.

In this week’s Wednesday column, Martin Wolf argued that the collapse of Lehman Brothers five years ago was merely a symptom of deep-rooted problems in the global economy. He suggests – rightly, in my view – that the underlying stresses stemmed from the global saving glut and excessively loose monetary policy – itself an inevitable response to the global savings glut.

It is odd, then, that while Mr Wolf admits the glut still exists, he concludes that policymakers today should persist with aggressive monetary stimulus. His “least bad” option is, however, precisely the approach which led to the crisis in the first place. Repeating the process could be regarded as no more than an act of folly. Continue reading »

The Federal Reserve refrained on Wednesday from reducing its experimental bond purchase program, thus maintaining its unconventional support for markets and the economy. In doing so it is probably signalling more than continuing worries about America’s tepid recovery, high unemployment rate and the risk of another round of self-manufacturing problems courtesy of Congress. It may also be signalling its concern about triggering renewed financial volatility that would undermine growth, job creation and global financial stability – worries that are unlikely to dissipate easily given the different reaction functions of the economy and markets.

Starting in the last few months of 2008, the Fed successfully normalised markets whose functioning was severely stressed by the global financial crisis. It pivoted in 2010 to the more ambitious goal of using unconventional monetary policies to deliver better economic outcomes; and did so with little policy support from other government agencies with better tools, but constrained by political polarisation.

With economic outcomes repeatedly falling short of their expectations, central bankers got dragged ever deeper into policy experimentation, including an $85 billion monthly bond-buying programme (known as “QE3”). Despite all the bold and innovative policy measures, however, they are still not in a position to declare a comprehensive victory.

Undoubtedly, the Fed has provided crucial time for endogenous healing while turbocharging risk assets. However, the resulting balance sheet repair has proved insufficient to decisively pull the economy out of a low-level growth equilibrium that creates too few jobs and contributes to income inequality. Indeed, Fed officials again had to lower their projections for the economy.

In the meantime, they will worry even more about the risk of collateral damage from such highly-experimental policies (eg, the risk of fuelling excessive financial risk taking, contributing to resource misallocations, and undermining the functioning of markets).

In balancing the “balance, costs and risks,” the Fed is not yet comfortable to do what many, includingme, had expected – namely embark on a “Taper Lite” involving an initial $10bn-$15bn cut in monthly purchases. I suspect that the decision may well have been heavily influenced by how the mere mention of a taper back in May contributed to significant financial market instability, both in the US and abroad.

Essentially, the Fed is dealing with a reality that is well known to students of economics: financial markets can react a lot quicker than the real economy. So, while the Fed is focused on calibrating its gradual transition out of QE with economic conditions (the “journey”), market participants are much more inclined to rush to what they deem to be the “terminal values” (the “destination”).

This basic difference is highlighted by how, notwithstanding a broadly unchanged outlook for the economy, the 10-year Treasury bond rose by around 100 basis points after the taper talk. The interest-rate sensitive segments – which had been bright spots – are already feeling the negative impact. Witness, for example, the 14 per cent decline in home purchase applications, 66 per cent drop in the refinancing index, and 18 per cent fall in home affordability.

Given these realities the Fed is not quite ready to embark on what will be a multi-stage journey out of unconventional policy – one that will sequentially involve the taper, less accommodative forward policy guidance and then normalising the fed funds rate. This is a journey that will take a few years. It is also fraught with risk and uncertainty.

In postponing the taper, the Fed only delayed what many market participants will continue to expect. This will not alter the prospects for the economy in any fundamental manner though it impacts financial markets. Indeed, the Dow hit an all-time high just after the Fed’s policy announcement. The Fed will thus need to monitor even more carefully domestic and international reactions, particularly those with large network effects and quick feedback loops.

The Fed’s greatest challenge is not in deciding on the optimal month to start the taper, as hard as this may be. It is in balancing its focus on a carefully-crafted journey (namely a gradual, measured and conditional normalisation of monetary policy) with the markets’ natural inclination to jump quickly to the destination (thereby risking to pre-emptively impose market-determined terminal values on a still-fragile economy). Unfortunately, there is no easy way to reconcile the two, regardless of how long the first taper step is delayed.

As we mark the fifth anniversary of Lehman Brothers’ demise and the onset of the global financial crisis, we must ask: what have we learnt? How well have we done? To what extent are the persistent weaknesses in the US and Europe a result of the misdeeds of the financial sector before the crisis, the crisis itself, and the way in which the crisis was managed?

The best – and it’s a great deal – that can be said is that we avoided the worst: another Great Depression. Whether this was a result of the forceful action of governments and central bankers is an exercise in counterfactual history – what would have happened without the massive bailouts we’ll never know for sure.

What we do know is a half decade after the crisis, gross domestic product in many European countries is lower than it was before the crisis, a worse performance than in the Great Depression; that some countries – like Spain and Greece – are in depression; that labour force participation in the US is at a 35 year low; that the income and wealth of most Americans is still markedly lower than it was before the Great Recession; that the banking industry is more concentrated, the financial sector less competitive, that new abuses get uncovered almost every day, that not a single senior banking official has been held accountable, and that the financial sector has succeeded in fighting off many of the reforms that would make it more competitive, more transparent, less risky, and less prone to take advantage of ordinary citizens. We know too that the increase in debts and deficits that resulted from the downturns is now constraining actions in both Europe and the US that would enhance growth and employment.

Defenders of the massive bank bailouts suggest that now that most of the money has been repaid, there is nothing to complain about. I disagree. The state lent the banks tens of billions of dollars at close to zero interest rate, which they then lent out at higher interest rates, giving them the money to repay the government. It was an easy-to-see through shell game. Had the government demanded more of the banks, our fiscal position would have been better; had we demanded as a condition for getting our money that the banks lendmore – rather than paying out bonuses – maybe we would have had a more robust recovery. Even Hank Paulson, former US treasury security, was surprised, and offended, at the banks’ behaviour.

Though the damage done to the economy by the financial sector totals in the trillions, the financial sector should not be blamed for all the woes of Europe and America today. In part, the bubble that deregulation and low interest rates helped create masked deeper problems; but unfortunately, the crisis has made it difficult to address these.

On both sides of the Atlantic there is a need to restructure the economy, to move away from manufacturing to a service sector economy. With productivity increases in manufacturing exceeding the pace of demand, global employment inevitably decreases; and shifting comparative advantage means Europe and America will receive a smaller share of this declining global employment. Markets do not make such transitions easily – as we saw as we moved from agriculture to manufacturing; there is a need for government – just at a time when government spending is being cut back.

Both Europe and America face growing inequality – worsened by the Great Recession. Just released data from Thomas Piketty and Emmanuel Saez show that 95 per cent of the gains in the US economy from 2009 to 2012 went to the top 1 per cent. Both Europe and America face weak aggregate demand, and this growing inequality is a prime cause.

But the financial crisis has constrained the ability and willingness of governments on both sides of the Atlantic to deal with this growing inequality – an inequality for which we pay a high price, an economic price in growth, an even greater price in an increasingly divided society.

But we should be clear that the euro crisis was not fundamentally caused by the financial crisis. The flaws in the structure of the eurozone would have eventually come to the fore. The crisis simply brought them out sooner than would otherwise have been the case.

Misguided ideas shaped the economic agenda in the years before the crisis. Ideas about limited government led, ironically, to the largest government interventions in the history of mankind. But the same ideology and ideas that prevailed before the crisis have held enormous sway in the years after the crisis: not surprising, since large inequalities of economic power lead to large inequalities in political power. The result is a world which is in some ways safer, in other ways riskier – but a world in which we have postponed doing anything about the fundamental problems we confront.

The trial of Bo Xilai is not lacking in drama. China-watchers everywhere have been following the case of the former member of the ruling politburo, who stands accused of corruption and covering up a murder, with great intensity. In China itself, it has captivated scores of followers on Weibo, a hugely popular social media site. Elsewhere there has been much breathless commentary about how the proceedings of the trial marked a new chapter in China’s legal history. But in fact the conduct of the trial may not be as novel as first thought. The real story may be in the other moves under way against other powerful players.

Much has been made of the robust physical appearance and cross-examination skills of Mr Bo. However, look closely, and it is clear he was careful in all his public statements. He did not suggest that the corrupt and opulent practices alleged were widespread among the party elite, he did not finger other senior compatriots, and he was careful in all cases to uphold the sanctity of the party. What is clear is that he carefully constructed a public image that he hopes will keep him in play for an uncertain future should an orthodox faction in the party come looking for a new champion.

The state’s case was more complicated and indicative of perhaps a larger campaign. There were, of course, the lurid details of the murder of British businessman Neil Heywood, for which Gu Kailai, Mr Bo’s wife, was earlier found guilty, and the ostentatious appetites of the new elite. However, the real thrust of the prosecution case was that Mr Bo contemplated the overthrow of the current elite through shadowy dealings with the security services. This was his truly unforgivable sin.

Although it was once a revolutionary party prepared to take remarkable risks, the modern Chinese Communist party is designed to promote cautious, status quo types with technical backgrounds and strong preferences for public order. However, despite the most effective culling mechanisms, sometimes a wolf slips through. Mr Bo was just such a wolf, prepared to use red-meat propaganda, the cult of personality, and the security services at his disposal to advance his political ambitions. So the first aim of the trial was to undermine his credentials as a communist, not his indulgences as a corrupt apparatchik.

Despite the publicity surrounding the case, there is much more drama brewing behind the scenes. Chinese authorities recently announced corruption investigations against senior executives from the state oil conglomerate, China National Petroleum Corporation. It was also revealed that Jiang Jiemin, the high-ranking state enterprise tsar, had been removed from his position for alleged “grave violations of discipline”.

Perhaps more importantly, Zhou Yongkang, former member of the Politburo Standing Committee — where he was responsible for security — is the target of a state-sanctioned probe for alleged corruption. Tellingly, one of the titbits discussed during Mr Bo’s trial were allegations of Mr Zhou’s rumoured role in suspicious plotting against the most senior members of the elite.

Mr Zhou’s involvement in all of this is highly unusual, given that no standing committee member – whether active or retired – has been scrutinised by state authorities for corruption since the end of the cultural revolution.

These public struggles are emblematic of a bitter underground battle between the orthodox and reform wings of the Communist party that are playing out with greater frequency and intensity since the new leadership team came to power. There are signs that these manoeuverings will reach a fever pitch just ahead of the assembly in November, where critical elements of the government’s economic agenda will be decided. A reformist coalition of finance and bank officials have squared off against a powerful bureaucratic combination comprised of the security and military services, party propaganda barons, and senior executives of state-run enterprises.

Under the direction of Premier Li Keqiang and Liu He, his point man for reform, a small team of reform-minded bureaucrats has put forward an ambitious plan for bank reform and new investment laws that could have significant implications for financial sector liberalisation. However, these plans are aimed like a dagger at the inefficient state-owned enterprises and bloated banks — and a business model that favours suppressed consumption, state subsidies, and export-led growth over a new direction that would put a premium on more consumer-led growth.

The big question mark amid the public trials, sordid speculation, and intraparty manoeuvring is where President Xi Jinping stands in all of this. To date, he has remained largely above the fray, manoeuvering among the factions, but it will be difficult to avoid hard choices for much longer.

This post has been amended to reflect the fact that Gu Kailai was found guilty of the murder of Neil Heywood

These are happy days in the Kremlin; one can only assume the vodka and caviar are being consumed with gusto. And it is not hard to see why. After decades of humiliation — including the cold war’s conclusion on terms sought by the west; the demise of the Soviet Union; and Germany’s unification within Nato followed by the alliance’s enlargement in eastern Europe — Russia is back.

Indeed, President Vladimir Putin ran something of a victory lap on the opinion pages of The New York Times on Thursday. His column reads in part as a summary of the Russian case against external (ie American) armed intervention in Syria. Mr Putin argues, without a shred of evidence, that it was the Syrian opposition and not the government that used chemical weapons. More seriously, he maintains that those fighting the government of Bashar al-Assad are dominated by anti-democracy extremists, who are the real threat; and that any military strike against the Syrian government would contravene international law.

Mr Putin does not leave it there, though. It is not just that his criticism of the use of military force around the world conveniently omits Georgia. He cannot resist patronising US President Barack Obama and lecturing Americans on what he sees as their attachment to the undeserved notion of American exceptionalism. What comes through is his resentment of both American primacy and Russia’s relegation to the periphery of global politics. Clearly, he is relishing both the image and the reality of the Obama administration coming to him to salvage what remains of its Syrian policy.

All this, of course, is taking place against the backdrop of US-Russian diplomatic exchanges to flesh out the proposal to use diplomacy to rid Syria of its chemical weapons. The question naturally arises: is it possible that Russia could be a partner, even rescuing Mr Obama from the predicament he created for himself by first declaring and then backtracking from his own “red line”?

The bottom line is that US-Russian partnership on Syria is possible – but it is at most a long shot. The two governments are still working at cross purposes, with Russian arms bolstering the Assad regime and US-supplied arms finally reaching elements of the opposition. And implementation of any plan to destroy Syria’s chemical weapons inventory promises to be extraordinarily difficult, given that there is no accessible accounting of what exists; the reportedly large number of munitions and amount of chemical agents; and, more than anything else, the reality that any disarmament programme would have to be carried out amid an intense civil war.

Making things even less likely to succeed is the fact that Russia will refuse to agree to support any use of military force against Syria if it refuses to comply fully and expeditiously with any arms control undertaking. Mr Obama would have been wiser to ask Congress to give him the authority to determine whether Syria was complying fully; and, if he determined not, to carry out limited strikes. The problem is not just that Congress would likely have refused to grant Mr Obama such powers at this point, but also that Syria (with Russian prodding) might do just enough in the way of compliance to keep alive the hope diplomacy will work, thereby undermining what support existed for even limited military action.

Does all this mean that we are back to a new cold war? The answer is no. The two countries have some common interests, including opposition to terrorism. But co-operation there and on other matters will be uneven and intermittent, as Mr Putin depends in large part on anti-Americanism for his political base. In addition, he has little incentive to reduce Russia’s nuclear weapons inventory, one of the country’s last claims to major power status. The likely future is one in which Russia will often be a spoiler from the US perspective, selling arms to Syria and Iran or blocking the US in the UN Security Council.

But Mr Putin will not want the competition to get out of hand, as Russia is not a great power capable of competing with the US on a global scale. It has a mostly one-dimensional economy, heavily reliant on oil and gas. Little in the way of a broad, modern economy exists. The population is only 143m and until recently was in decline. The military cannot compete on a modern battlefield. The politics, like the economics, are top heavy; Mr Putin is vulnerable to unrest at home and offers no vision abroad.

All of which to say is that, while Mr Putin can fairly claim to have won this round of diplomacy, through his own cleverness and Mr Obama’s multiple missteps, he cannot assume it is the harbinger of a trend, much less an era of global politics. Tactical triumphs cannot obscure or do away with the larger strategic reality of Russian limitations and weaknesses, and America’s underlying power and reach. Ironically, it would take a very different Russia, one incompatible with Mr Putin’s authoritarianism, to be a 21st century power to be reckoned with.

The author is president of the Council on Foreign Relations and, most recently, the author of ‘Foreign Policy Begins at Home’

Barack Obama is both right and wrong. He is right in saying that “the credible threat of US military action” pushed Syria to give up its chemical weapons. He is wrong in believing that a “limited military strike” would have made the Syrian situation better. If indeed the US president had ordered a bombing of Syria, it would have made him and some Americans feel good. But it would have done no good. The people of Syria would not be better off. It would only have made a messy situation messier. This is obvious.

It is good that Mr Obama has decided to pursue the diplomatic path. Yet the bad news here is that America has over time lost its skills in diplomacy. If anyone doubts this, just look at Washington’s failure to even persuade its fellow Group of 20 countries to join its statement on Syria.

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The last-ditch effort by Moscow to avert a US strike against Syria – proposing Damascus signs up to the global ban on chemical weapons and puts its chemical stockpile under international controls – has merit and is worth pursuing. It also demonstrates that the threat of using even limited force can have real utility, and that a speedy congressional vote backing President Barack Obama on strikes remains necessary.

When the first reports of the deadly poison gas attack emerged from Damascus three weeks ago, the issue of military action took an important turn. Up to that point, the Obama administration had steadfastly – and rightly – resisted calls to intervene militarily in the increasingly bloody civil war. Not only did the president confront a war-weary public that had absolutely no interest in becoming entangled in another Middle Eastern conflict, but he had also long concluded that doing so would make this his war – and ending the conflict his responsibility. He rightly held back.

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Yet the use of poison gas by the regime of Bashar al-Assad made it impossible to stand aside any longer. Mr Obama had drawn a red line 12 months earlier, when he declared that the use of chemical weapons would change his calculus on the use of force. The use of these weapons also represented a moral and strategic affront to the world.

For almost a century, the use of chemical weapons has been an international taboo. They were banned by the Geneva Protocol of 1925, negotiated as a result of widespread revulsion at the large-scale deployment of chemical agents in the first world war.

Though ruthless dictators would at times resort to using poison gas – including Benito Mussolini in Abyssinia in the 1930s and Egypt’s Gamal Abdel Nasser in Yemen in the 1960s – it was not until the Iran-Iraq war in the 1980s that chemical weapons would again be used on a large scale. This, coupled with the gassing of Kurdish civilians by Saddam Hussein in 1988, reinforced international efforts to ban not just the use of chemical weapons, but also their production and possession.


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These efforts succeeded in 1993, with the conclusion of the chemical weapons convention, which has now been signed by all but five countries. Syria, unfortunately, is one of the five. And it is Syria that has now become the first country actually to use chemical weapons since the convention went into force.

Mr Obama has rightly insisted that there must be a firm response to Syria’s breaking of this well-established taboo – a military strike that would punish the Assad regime, degrade its ability to launch further strikes, and deter it and others from resorting to chemical weapons use in future. In the past week, the administration has won more international support for a decisive response – including from a majority of countries attending the summit of the Group of 20 leading nations in St Petersburg, and from EU and Arab League foreign ministers at the weekend.

The growing sense that the Syrian regime’s gassing of its own people cannot be allowed to stand no doubt motivated Moscow to float the idea of Damascus signing the chemical weapons convention, placing its storage sites under international control and destroying all weapons stocks. More than anything else, such an outcome would reinforce the international norm against chemical weapons. It would be much preferable to the alternative of having to use force.

But the details will matter. Getting international inspectors into Syria will require either massive armed protection or an end to the raging conflict – neither of which is likely any time soon. And, so long as the weapons remain under the regime’s control, their use remains a distinct possibility. Of course, the same would be true following the kind of limited strike the administration has contemplated.

Nevertheless, Moscow’s idea is worth pursuing. Persuading Russia to co-operate in getting rid of Syrian chemical weapons is in everyone’s interest. If the end result is a Syria with no chemical weapons, the world will be better off. We need to examine the details of the plan, and to establish a very clear timeline – days or weeks, not months – to gaining Damascus’ full agreement on such a plan.

In the meantime, it is critical to keep the pressure on Syria – including the threat of air strikes backed by a strong, affirmative vote by Congress. The very real prospects of these strikes seems to have brought Moscow around. Continuing the credible threat of force may do the same with Damascus – to the benefit of all.

The writer, US ambassador to Nato 2009-13, is president of The Chicago Council on Global Affairs

Some central banks in advanced economies have recently put themselves into an uncomfortable corner. They have started to implement “forward guidance”, which consists of communicating to the markets their views about the appropriate level of interest rates, with the aim of influencing them. Unfortunately, the strategy is not working as expected. In spite of the central bank commitment to keep the level of policy rates unchanged, or even lower, for a prolonged period of time, market rates have risen instead.

The reason why forward guidance is not working is that it is not time consistent. If central banks really want to convince market participants that the prevailing rates over different maturities should be lower, they should explain why. In particular, they should provide arguments to dismiss the assessment made by market participants according to which interest rates are expected to rise over the medium term. In this respect, they could use at least two arguments.

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The ghost of Tony Blair has haunted the corridors of the Westminster parliament for the past two weeks. David Cameron acknowledged that bad memories of the war in Iraq, and the dubious intelligence reports published to support it, had “poisoned the well”. Many members of parliament experienced painful flashbacks to the “dodgy dossier” and chose to defy their current leaders.

A terrible clanging sound, emanating from Mr Blair’s chains, can also be heard as the House of Commons public accounts committee pursues its inquiries into the management practices of the BBC. Lord Patten of Barnes, the BBC Trust chairman, and Mark Thompson, his former director-general (now steering The New York Times through shark-infested waters), have presented starkly different versions of who was aware of, and responsible for, some remarkably generous pay-offs to departing BBC executives. MPs can hardly believe their luck at having stumbled on such a noisy hornets’ nest.

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Many Financial Times readers, like me, have shied away from US military intervention in the civil war in Syria. Yet, aside from some familiar arguments, three stand out for granting President Barack Obama’s request for authorised action. First, get past the annoyance with the way the administration has handled the issue. Second, reflect on a couple of historical episodes – Guernica and Halabja. Third, focus on feasibility.

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If Germany’s economic model is the future of Europe, we should all be quite troubled. But that is where we seem to be going. The apparently successful re-election campaign of Angela Merkel, the Christian Democrat chancellor, promises “Germany’s future in good hands”. More, in other words, of the same. The policy response to the eurozone crisis is likely to remain a programme to induce member states to follow Germany’s path to competitiveness: cutting the cost of labour. Make no mistake; that has been the basis of the nation’s export success in the past dozen years; and exports have been its sole consistent source of growth in that period. But low wages are not the basis on which a rich nation should compete.

Since 2003 a falling unemployment rate has been the consequence of the creation of a large number of low-wage and part-time or flexitime jobs, without the benefits and protections afforded earlier postwar generations. Germany now has the highest proportion of low-wage workers relative to the national median income in western Europe. Average wages increased by more than inflation and productivity growth in the past year for the first time after more than a decade of stagnation.


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Ideally, a wealthy country should stay competitive through research and development, and capital investment. Instead, total gross fixed investment has fallen steadily in Germany, from 24 per cent to less than 18 per cent of gross domestic product, since 1991. The recent OECD Economic Survey of Germany states that German investment has been persistently well below the rate of the rest of the Group of Seven leading economies since 2001 (and not just because of the bubbles of the mid-2000s in the US and UK). Even the employment mini-miracle and export boom since 2003 were not enough to induce German businesses to increase investment – and public infrastructure investment has been even more lacking.

The other way for a rich country to stay at the top of the value-added chain, and thus compete on productivity, is to invest in human capital – that is, to educate its workforce. In Canada, France, Japan, Poland, Spain, the UK and the US, the share of young workers with advanced education is at least 10 per cent higher than in Germany – in most of them, 20 per cent higher or more. Germany, moreover, is one of only two advanced economies in which the share of those aged 25-34 with higher-education qualifications is the same as, or smaller than, in preceding generations (the US is the other). Germany has failed to invest in its public university system while the private sector has maintained but not expanded the supply of its famous apprenticeships.

The result is that Germany’s productivity growth has been low compared with its peers. Growth in gross domestic product per hour worked is 25 per cent below the OECD average, whether one goes back to mid-1990s or looks at just the past decade – and whether or not one excludes the bubble years for the US and UK. With these productivity numbers, it is no wonder German business is competing only by reducing relative wages and moving production east.

Examples of outstanding businesses from the Mittelstand sector – middle-sized, family-run companies – and their manufactured exports to China should not obscure the reality. As the Peterson Institute’s Lawrence Edwards and Robert Lawrence show in their new book Rising Tide , manufacturing’s share in total employment has fallen by the same amount in the past 40 years, about 15 per cent, in almost all the advanced economies – including Germany. The only rich economies where manufacturing employment shrank less were Italy and Japan, neither engines of growth. The terms of trade for manufacturing – that is the relative value of manufactured goods from a country compared with all of its manufactured imports – have risen by the same amount for the US as for Germany since 1990. There is no evidence for special manufacturing success in Germany.

Some might say the country is merely making the best of the situation in which richer economies find themselves in a globalised world – particularly in regard to downward wage pressure for low-skilled labour in the west. Certainly, it is not alone in its rising inequality and the reluctance of its corporations to invest. Such an assessment, however, blinds us to the gains to be had from a different kind of reform agenda that is possible for Germany and the euro area.

German under-investment is the result of deep structural problems in the economy, which are not the fault of its now more flexible labour markets. The export obsession has distracted policy makers from recapitalising its banks, deregulating its service sector and incentivising the reallocation of capital away from old industries. Furthermore, public investment in infrastructure, education and technological development could help increase profitable private investment, which would lead to growth with higher wages.

Dependence on external demand has deprived Germany’s workers of what they have earned, and should be able to save and spend. This leaves them dependent on exports for growth, in a self-reinforcing cycle. Most importantly, this means they move down the value chain in relative terms, not up. The pursuit of the same policy by its European trading partners will reinforce those pressures. Wage compression will not be a successful growth strategy for Germany’s or Europe’s future.

The writer is president of the Peterson Institute for International Economics


Letters in response to this article:

Germany is facing up to competition / From Dr Peter Patel

Germany is far from ‘crushed’ / From Mr Willem Thorbecke

Syrian refugees stand sit in front of a closed shop in Reyhanli, Turkey, Saturday, Aug. 31, 2013. U.S. President Barack Obama said he has decided that the United States should take military action against Syria in response to a deadly chemical weapons attack, but he said he will seek congressional authorization for the use of force. (AP Photo/Gregorio Borgia)©AP

The repeated use of chemical weapons against the Syrian people has brought the civil war to a new diplomatic and political boil. Yet none of the military options being canvassed – or, in the UK, rejected – promises a decisive shift in the course of the conflict. We are not yet anywhere near the nadir of the humanitarian crisis already consuming five countries at the heart of the Middle East.

The International Rescue Committee has just completed a six-week audit of the situation in Syria and its neighbours. The litany of suffering is grim, the dynamics are all going in the wrong direction and the prospects are bleak. For geopolitical reasons, as well as basic humanity, we need a fundamental step change in the scale of effort.


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A third of Syria’s 22m population have been forced from their homes. Of these, 5m are trapped in the country. They are at risk from the violence that has claimed 100,000 lives, including those of 7,000 children, but also from deadly diseases such as typhoid fever as clean water and sanitation breaks down. Syria’s own government says more than 60 per cent of its hospitals and 80 per cent of its ambulances have been hit by the war. Food aid struggles to get through to civilians as the combatants flout basic norms of conflict.

Outside Syria, more than 2m refugees have sought shelter in Jordan, Lebanon, Iraq and Turkey. The UN expects this figure to reach 3m by the end of this year. The strain on these fragile countries is huge. Zaatari refugee camp in Jordan has, within 18 months, become in effect the third-largest city in the country, with new arrivals still coming in (including 13 babies born every day). Meanwhile, most Syrian refugees are not in the camps. They are scraping by; whole families are crammed into small apartments or squatting in abandoned buildings.

Our findings confirm that the Syrian war – part democratic revolt, part sectarian explosion, part proxy regional conflict, part global power play – is now a defining humanitarian crisis. People have compared it to the refugee crisis ignited by the Rwandan genocide of the 1990s, when 2m people fled. But in scale and complexity, it is more like the after-effects of the Soviet invasion of Afghanistan, when as many as 7m Afghans, out of a total population at the time of 16m, fled – mainly into Pakistan (which had its own problems).

The parallels go beyond numbers. As with Afghanistan, regional and global struggles make Syria a toxic brew. And, as with Afghanistan, there is real potential for the centre and east of Syria to become a regionally and even globally dangerous no-man’s-land. This is one of the terrible consequences of the fragmentation of the Syrian opposition and the failure of western governments, with allies such as Turkey, to break the diplomatic and military deadlock.

The humanitarian effort over the past two years has made a difference; 3m Syrians in the country are receiving life-saving help. Refugees outside are receiving education, housing and cash assistance. But whether as a result of the financial crisis, or post-Iraq intervention fatigue, the UN has raised only about a third of the required funds for its global appeal.

There just are not enough of the basics of life reaching people in need. Many are cut off from aid because aid organisations cannot breach violent sieges, risk arrest or murder at checkpoints, or survive aerial bombardment. And that is just the emergency response – before anyone starts thinking about rebuilding the majority of urban areas in Syria that have been destroyed.

The humanitarian priorities should be clear: reach those in Syria caught in the crossfire or its aftermath, and shore up the livelihoods of those in neighbouring countries. For those in the country, non-governmental organisations cannot stop the killing, but they can staunch the dying. That requires safe access for food and medical help, across the country and across combat lines. For doctors to fear reprisals for treating the wounded – and I have heard such concerns myself from Syrian surgeons – takes us back to the dark ages.

In neighbouring countries, there is desperate human need and growing political pressure. The host governments at the local and national levels, especially in Jordan, Lebanon and Iraq, cannot be expected to manage population flows on this scale alone. Their demands for help should be heard.

It is clear that, while international engagement is decreasingly popular in the advanced democracies, a multipolar world makes it increasingly necessary. Humanitarian intervention is about human need, not political sides – but it has political consequences. There is capacity to save more lives, but this needs resources and political will. The drums of war are reason to redouble humanitarian efforts, not forget them.

The writer, a former British foreign secretary, is president and chief executive of the International Rescue Committee

This week’s heavy schedule of data releases will likely have a big, if not determining, say in “when” and “how” the US Federal Reserve tapers its quantitative easing programme – that is, start moderating its exceptional support for markets and the economy. And while most assessments will focus on the timing, scale and scope of the policy adjustments, the “why” will be as important, if not more so in shedding light on what may lie ahead.

The context, while quite well known by now, is worth mentioning given its relevance to the outlook.

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Foreign policy is often difficult, as the crisis in Syria all too regularly shows. But the Obama administration has made a difficult situation much worse by articulating a series of objectives (“Bashar al-Assad must go”; “Chemical weapons use crosses a red line”) and policies (“we will arm the opposition”) and then failing to follow them through. Requiring authority from Congress at the eleventh hour introduced further undesirable uncertainty. Improvisation and policy making on the fly can be disastrous.

Adding to the difficulty is the reality that US interests are greater than Washington’s influence; the options that exist are few and in every case come with drawbacks. Nevertheless, the US does have real interests, some intrinsic to the situation and some of its own making. What is more, not acting is as much of a policy choice with consequences no less significant. Which is to say declaring Syria to be “too hard” and throwing up one’s hands in exasperation is not a strategy. Similarly unhelpful at this point are claims that if only the world had acted earlier there would be better choices now; that may be the case, but it is irrelevant.

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On Saturday Australia will go to the polls. Prime minister Kevin Rudd – recently returned to office in place of the deposed Julia Gillard – has called an election that promises to set an important course for the country in the period ahead. Facing off against Mr Rudd and the Labor party is the Liberal-National Coalition led by Tony Abbott.

This is a contest that bears close scrutiny because Australia’s importance and stature has risen in Asia and the world in the past two decades. The country has proved to be one of the most effective in terms of balancing its strong political and security ties with the US with its robust commercial and economic interactions with China.

The election has been hard-fought – the bitterness between the two parties is evident – but the US will do well with either party in power. Still, a closer look at the respective leaders is in order.

It is not too much of an exaggeration to suggest that, despite some personal foibles, Mr Rudd represents in many respects a reincarnation of Winston Churchill in the region. More than any other Asian leader, in the past decade he has provided a clear and resonant strategic framework for integrating and engaging (and, when necessary, confronting) a rising China. He has understood with unusual clarity that the country’s ascendancy is the defining feature of modern global politics, and that every manner of statecraft must be adapted accordingly. With an occasional Churchillian flair for drama and rhetoric, he has shaped contemporary assumptions about Beijing’s leadership and the appropriate approaches to configuring multilateral diplomacy – such as the recently recrafted East Asia Summit. Not since Singaporean prime minister Lee Kuan Yew during the Vietnam war has a leader had a bigger behind-the-scenes impact on American thinking on Asia than Mr Rudd.

Mr Abbott, although occasionally underestimated, has a former boxer’s perseverance that commands respect. It is impossible not to focus on his hands in any meeting with him: they are hard from pummelling his opponents in the ring during his student days. Extremely fit, he radiates a personal discipline that is readily apparent. His ruggedness is undoubtedly appealing to a modern Australian political psychology that is urban-dwelling but still animated by the outback. In a choice between great powers, do not be surprised if the Anglophile Mr Abbott chooses Britain over both the US and China.

The campaign has been fought over issues of energy regulation, the handling of boat people and refugees, and ultimately whether Australia is ready for change. The country’s politics have often followed an unusual inverse relationship: the better the times, the nastier the politics. Australia has experienced remarkable prosperity in the past several years, fuelled largely by massive exports of raw materials to the behemoth Chinese economy to the north. Mining cities such as Perth on the west coast can feel a little like San Francisco during the Californian gold rush. Largely unstated in the campaign, however, is that a slowdown is coming, with China’s engine of growth running out of steam. This will probably have significant implications for Australia’s growth, and hence its politics.

Another curious feature of the debate is that both sides agree that the country inhabits an uncertain and potentially dangerous neighbourhood – yet defence spending has fallen precipitously in recent years. Both sides have attempted to address the issue through fancy accounting rather than serious proposals for spending. Richard Armitage, a former US deputy secretary of state, and the acknowledged godfather of the bilateral relationship, recently complained: “Australia is making the assumption that the US will always be there for her, but you are also saying that Australia does not want to pull its fair share when it comes to defence.”

Americans generally do not take sides in the elections of friendly nations, and most certainly the bilateral relationship will continue to thrive under either party. There are critical decisions that hang in the balance, to be sure – on energy and climate change; on relations with Indonesia; on the balance between the US and China in Australia’s foreign policy; and on defence spending – but the Pacific ties that bind the US and Australia are perhaps the closest on the planet today.

Yet it is undoubtedly the case that Mr Rudd has left a pair of ocean liner-sized shoes to be filled in his capacity as Asian statesman. At a time when the US is entering the next phase of its “pivot” to Asia, here’s hoping that whoever prevails continues to help Australia punch above its weight. And don’t underestimate Mr Abbott’s upper cut.

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