Archive for the ‘Topics’ Category


It’s Here, It’s Unclear, Get Used to It

By R. Daniel Kelemen

The eurozone’s troubles no longer qualify as a crisis, an unstable situation that could either quickly improve or take a dramatic turn for the worse. They are, instead, a new normal — a painful situation, to be sure, but one that will last for years to come. Citizens, investors, and policymakers should let go of the idea that there is some magic bullet that could quickly kill off Europe’s ailments. By the same token, despite the real possibility of Greek exit, the eurozone is not on the brink of collapse. The European Union and its common currency will hold together, but the road to recovery will be long.

It has been nearly two and a half years since the incoming socialist government in Greece revealed the extent to which its predecessor had accumulated debt, precipitating an economic storm that has left slashed budgets, collapsed governments, and record unemployment in its wake. With each dramatic turn, observers have anticipated the story’s denouement. But again and again, a definitive resolution — either a policy fix or a total collapse — has failed to emerge.

The truth is that there are no quick escapes from the eurozone’s predicament. Divorce is no solution. Although some economists suggest that struggling countries on the periphery could leave the euro and return to a national currency in order to regain competitiveness and restore growth, no country would willingly leave the eurozone; doing so would amount to economic suicide. Its financial system would collapse, and ensuing bank runs and riots would make today’s social unrest seem quaint by comparison. What is more, even after a partial default, the country’s government and financial firms would still be burdened by debt denominated largely in euros. As the value of the new national currency plummeted, the debt would become unbearable, and the government, now outside the club, would not be able to turn to the eurozone for help.

Some economists go further and argue that countries on Europe’s periphery could thrive outside the euro straitjacket. This is equally unconvincing. Southern European countries’ economies suffer from deep structural problems that predate the euro.  Spanish unemployment rates fluctuated between 15 and 22 percent throughout most of the 1990s; Greece has been in default for nearly half of its history as an independent state. These countries are far more likely to tackle their underlying problems and thrive inside the eurozone than outside it. Read more…

As published in on May 17, 2012.


By Martin Wolf

What will be the role of the US in the 21st century? This is a question I rashly agreed to address last week at the Carnegie Council in New York. In analysing it, I considered a closely related issue that also exercises Americans: is the future role of the US in its own hands? The answer is: yes, but only up to a point. The US can control what it does. But it cannot control what others do.

The historic dominance of the US is the fruit of its exceptional assets. It is a continental power bounded by oceans to the east and west, and unthreatening neighbours to the north and south. It has huge, albeit dwindling, natural resources. It has had the world’s largest economy and the highest output per head since the late 19th century. The market-driven US economy has also been the world’s most innovative since at least the same era.

The US is home to the world’s most influential financial markets, albeit ones that triggered the Great Depression and Great Recession of recent years. It has been the issuer of the world’s main reserve currency since the first world war. It has offered one of the largest import markets, surpassed only by external imports of the EU.

The US possesses the world’s most technologically advanced and potent military. Since the second world war, it has also had more of the world’s leading universities and research institutions than any other country. It has the world’s most potent popular culture. Its political values still grip the world’s imagination, even if it has frequently fallen short in practice. Its democratic system has proved sufficiently legitimate and flexible to cope with the many challenges history has thrown up.

Possessed of all these assets, the US managed to form strong alliances and to win its 20th-century wars, both hot and cold, against Germany, Japan and Russia. It shaped the open world economy, which was born after the second world war then became global after the collapse of the Soviet empire. It has offered the world’s most influential model of modernity. Whether we like it or not, we all live in the world it has made.

How much of this array of assets will the US retain in this century? Read more…

As published in on May 15, 2012.


One bullseye cannot rescue Obama’s record

By Gideon Rachman

“Weak.” “Apologist.” Those two words are repeated endlessly in the Republican party’s attack on Barack Obama, as it tries to persuade voters that the US president is not worthy of another term as commander-in-chief.

The charge of weakness will be difficult to make stick. As the president’s team will endlessly remind us, he is the man who sent in a combat team to kill Osama bin Laden – against the advice of some of his aides – and who has ruthlessly pounded al-Qaeda camps in Pakistan with drone strikes.

The irony is that there are really serious criticisms that can be made of Mr Obama’s handling of foreign affairs. But the real problem is not that he is weak or apologises for the US. It is that he has over-promised and under-delivered. Fortunately for the president, this is a relatively complicated idea that relies on some knowledge of world affairs. Therefore it is not a critique that the Republicans are likely to attempt.

Nonetheless, it is sobering to measure Mr Obama against the goals he set himself. His international priorities in 2008 were clear and ambitious. He intended to solve the Iranian nuclear issue through diplomacy. He wanted to make peace between Israel and Palestine. He would transform America’s image in the Muslim world. The Guantánamo prison camp would close and terrorists would be tried in US courts. The new president would get the US out of Iraq and use the freed-up resources to fix Afghanistan. And he would dramatically improve relations with Russia and China, allowing the world to make progress on issues of common concern, from global warming to global trade.

Go down this checklist and you will notice far more failures than successes. The rapprochement with Iran never happened. Instead, as Mr Obama nears the end of his first term, the US and Iran are dangerously close to armed conflict. The president’s efforts to revive the Middle East peace process have got nowhere. Guantánamo has not closed and the trial of Khalid Sheikh Mohammad is taking place there. Read more…

As published in on May 14, 2012.


Amid growing risk of a Greek exit, the euro zone has yet to face up to the task of saving the single currency itself

The respite in the euro crisis lasted a few short months. Now, despite a €130 billion ($169 billion) second bail-out for Greece, a fiscal compact agreed on by the euro-zone leaders in December, and €1 trillion of cheap long-term loans from the European Central Bank, the night terrors are back. How dispiriting that Europe is still so ill-prepared for the ordeal to come.

Time is short. In France voters have given their new president, François Hollande, a mandate to alter the “austere” course set by his ousted predecessor, Nicolas Sarkozy, and Angela Merkel, Germany’s chancellor, and to focus on growth. Mrs Merkel says she will not change the fiscal compact, but Mr Hollande needs something to show voters in legislative polls next month. More threatening is the second election looming in Greece, where parties are struggling to form a government. If a majority of Greeks again vote to reject the spending cuts and reforms that go with their country’s bail-out, then euro-zone governments—in particular, Germany’s—will face a drastic choice. Mrs Merkel will either accommodate Greece and swallow the moral hazard of rewarding defiance or, more likely, stand firm and cut the Greeks adrift (see article).

The idea of a chaotic Greek departure from the euro at a time of Franco-German disunion should terrify everyone it touches (the damage it would do the world economy may well be the biggest risk to Barack Obama’s chances of re-election, for instance). With so much at stake, the rest of the euro zone urgently needs to lower the risk that contagion from a Greek exit would infect Portugal, Ireland and even Spain and Italy. The worry is that, just at the moment when hardheaded realpolitik is needed, politics has fallen prey to self-delusion, with leaders in all the main countries peddling seductive half-truths that promise Europe’s citizens an easier way out.

Stories that people tell…

The euro zone needs to do a lot of hard things. Our list would include at the very least: in the short term, slower fiscal adjustment, more investment, looser monetary policy to promote growth and a thicker financial firewall to protect the weaklings on the periphery from contagion (all of which the Germans dislike); in the medium term, structural reforms to Europe’s rigid markets and outsize welfare states (not popular in southern Europe), coupled with a plan to mutualise at least some of the outstanding debt and to set up a Europe-wide bank-resolution mechanism (a tricky idea for everyone). It is an ambitious agenda, but earlier this year, with the Italians, Spanish and Greeks all making some hard choices and ECB money flushing through, the politics seemed possible.

As published in (from the print edition) on May 12, 2012.


By Martin Wolf

The elections in France and Greece tell us that austerity fatigue has set in. This is not surprising. For many countries no plausible exit exists from depression, deflation and despair. If the currency union were a normal fixed exchange rate arrangement, it would collapse, as did the gold standard in the 1930s and the Bretton Woods system in the 1970s. The question is whether the fact that it is a monetary union will do more than delay that outcome. The last chance of bringing needed change rests on the shoulders of François Hollande, the newly elected president of France. Mr Hollande says his mission is to give Europe “a dimension of growth and prosperity”. So can he achieve this laudable aim?

Fiscal tightening does not improve outcomes in shrinking economies. Thus, austerity is merely begetting more austerity. According to the International Monetary Fund, the ratio of gross public debt to gross domestic product will rise, not fall, in every year from 2008 to 2013 in Ireland, Italy, Spain and Portugal. It will briefly fall in Greece, but only because of its debt restructuring.

The most frightening data are for unemployment (see chart). The proportion of young people between the ages of 15 and 25 who are now without a job is 51 per cent in Greece and Spain, 36 per cent in Portugal and Italy and 30 per cent in Ireland. France is in better shape, but even there the picture is dire, with one in five young people out of work. Is it plausible that people will put up with this indefinitely? No. Far more likely is a repetition of the protest votes we have seen in these elections. Nicolas Sarkozy was the eighth leader of a eurozone member country to have been swept from office in little over a year.

Economic prospects are poor. The IMF forecasts that the economy will shrink this year, in real terms, in Greece, Italy, Portugal and Spain and grow by just 0.5 per cent in Ireland. Growth is forecast, optimistically, at close to zero in the first four countries in 2013. This is politically perilous. The emergence of still more extremist parties and a rising sense of betrayal seems inevitable. It is also economically dangerous: how many of the brightest young people are now seeking to emigrate?

Something must change. Yet all routes seem blocked. Jens Weidmann, Bundesbank president, has argued in the Financial Times that monetary policy has reached, if not exceeded, its limits. The fiscal compact is designed to preclude discretionary fiscal policy. Anyway, in the absence of fiscal solidarity, member countries that face unsustainably high interest rates have no room for manoeuvre, while the currency union lacks a federal fiscal actor. Read more…

As published in on May 8, 2012.

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