Monthly Archives: May 2014

If European leaders want to fight the wave of eurosceptics which has risen with last week’s parliamentary elections, they have to address the two main criticisms of the EU: a lack of legitimacy and inadequate economic policies.

There are two ways to address the lack of legitimacy of European institutions. The first is to strengthen the national basis of representation. This would mean involving more directly the party leaders who won the largest support at the election – including Nigel Farage of the UK Independence party, Marine Le Pen of and Alexis Tsipras of Greece’s Syriza – to discuss Europe’s way forward. It is understandable that some heads of state do not want to follow this line. Read more

Barack Obama’s long-anticipated speech on Wednesday at West Point, the US Military Academy, was designed to answer a growing number of domestic critics of his foreign policy, who believe he is not doing enough to advance American interests around the world. It was also intended to push back against the growing tide of isolationism in a country preoccupied with domestic challenges and disillusioned with the results of long wars in Iraq and Afghanistan. And the address was meant to reassure America’s friends around the world.
Not surprisingly so ambitious a speech, aimed at so many audiences, failed to meet any, much less all, of its goals. Read more

Mainstream politicians throughout Europe would be well advised to heed the warnings of Manuel Valls, the French prime minister, who labelled yesterday’s European election results “a shock, an earthquake that all responsible leaders must respond to”. That is not because the European project will be derailed by the new parliament (it will not). Rather, it is because an inadequate response risks damaging its members further, in ways that would be even harder for any government to fix.

Until now, many of Europe’s more traditional leaders had taken considerable comfort in the massive transformation of the region’s financial landscape. In less than two years, they had gone from battling a financial crisis to enjoying a period of tranquillity that even saw these same spreads reach record low levels just a couple of weeks ago. Yet some were punished heavily at the ballot box because they failed to deliver on what really matters for citizens – particularly growth, jobs and rising living standards. Read more

Despite Russia’s recent underperformance, the size and potential of its economy has made it an attractive prospect for global companies. From German manufacturers to French and Italian luxury brands and British retailers, businesses have been drawn there to trade and invest. For them Russia has been too big to miss.

But today a different view is taking hold: that unless President Vladimir Putin’s attention shifts urgently from political entanglement in his neighbourhood to prioritising his nation’s economic needs, Russia’s disappointing economic performance will become an established trend.

Future investment will depend on perceptions of political risk as well as expected economic returns – and Mr Putin’s apparent readiness to see Russia isolated in an interdependent world has increased this risk. Read more

Relations between America and China have been much improved of late. A Chinese leadership focused on domestic reform, a recovering US economy, a recent easing of tensions between China and Japan, and the distraction provided by Russia in Ukraine have all helped. That’s why it’s all the more striking that a Pennsylvania grand jury made international headlines this week with the indictment of five Chinese military officials on charges of computer hacking and economic espionage. Beijing angrily rejected the charges and accuses Washington of hypocrisy. Read more

The US Treasury department recently completed its semi-annual ritual of examining whether America’s trading partners have been manipulating their exchange rates to increase their trade surpluses. Not surprisingly, the Treasury focused on China. And once again it complained that the Chinese renminbi is undervalued but stopped short of accusing Beijing of currency manipulation in order to avoid automatically triggering a penalty on China.

That ritual has been repeated for more than 20 years since Congress passed the legislation ordering the Treasury analysis. It is now time to bring it to an end.

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Mark Carney brought sporting metaphors back to the Bank of England’s quarterly press conference today, likening the UK’s recent economic progress with England qualifying for the World Cup. It was good news, he said, but the real tournament had yet to begin.

The more worldly members of the press corps then jumped to compare the Bank’s benign forecasts for the economy with the deluded hopes of England’s football fans as they prepare to head off to Brazil. We always think this time will be different, they suggested. And we are almost always wrong. Read more

The five central Asian republics, tied to Russia’s overlordship through a welter of economic and social ties, are all feeling the heat from the crisis in Ukraine.

However it is tiny Kyrgyzstan – landlocked between the mighty powers of Russia and China, and surrounded by unstable neighbours such as Afghanistan and Uzbekistan – that is feeling the heat most. America’s military bases, and its enlarged diplomatic presence in the region will be wound up this year, along with its presence in Afghanistan. Read more

Monetary policy in the eurozone seems to be facing a conundrum. Each time the European Central Bank signals its intention to ease its policy stance, market sentiment improves markedly, which attracts capital flows to the euro area. This in turn leads to a rise in asset prices, including the exchange rate.

The reason is that the eurozone, in particular some of its member countries, badly needs lower interest rates to achieve debt sustainability. If nominal interest rates remain above nominal gross domestic product growth, a higher primary surplus would be required to stabilise and reduce the debt, which means more austerity and a renewed risk of vicious circle of low growth and higher debt. If instead interest rates fall further, the current fiscal plans become more sustainable, which is good news for investors. Read more

China is on the cusp of surpassing the US as the world’s biggest economy based on purchasing power, at least a decade sooner than many expected. That is the conclusion of the April report of the International Comparison Program, undertaken under the auspices of the World Bank – a report that China apparently tried to suppress. Those familiar with the effort indicate that Chinese advisers and surrogates waged a rearguard effort for at least a year, seeking to undermine the methodology and data on which the work was based.

On one level, China’s resistance to being labelled number one is somewhat at odds with the country’s longstanding obsession with building wealth and power. Chinese officials might be expected to bask in such statistical accolades, given the relentless quest the nation has undertaken. But instead the Chinese leadership has demurred, doing everything in its power to discredit the report and distance itself from the conclusion. Read more

The war on drugs has been a $1tn failure. For more than four decades, governments around the world have pumped huge sums of money into ineffective and repressive anti-drug efforts. These have come at the expense of programmes that actually work such as needle exchanges and substitution therapy. This is not just a waste of money, it is counterproductive.

The London School of Economics has just completed perhaps the most thorough account of the war on drugs done to date. The conclusion, backed by five Nobel Prize-winning economists: it has done more harm than good. Read more

The British economy is the standout member of the Group of Seven rich nations. Over the last quarter the UK had economic growth at an annual rate of more than 3 per cent. In the same period the US barely grew, continental Europe remained in the doldrums and Japan struggled to maintain momentum. No surprise then that many have seized on Britain’s strong performance as vindication of the austerity strategy pursued by the UK government since 2010, and as evidence to refute the idea of secular stagnation – that lack of demand is a constraint on growth.
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