Archive for the ‘Topics’ Category


By Jackson Diehl

The worrying news from China is that the country appears headed toward an economicand political crash sometime in the next five years, if current trends continue. The somewhat better news is that a large part of the elite grasps that danger, and is talking fairly openly about the far-reaching change that will be needed to prevent it.

In eight days of meetings with Chinese academics, economists, journalists, businessmen and government officials this month, I encountered little of the rising-superpower hubris that might be expected from a country perceived in most of the West as an unstoppable juggernaut. Instead, I heard considerable anxiety about a slowing economy and an uncertain political transition this year, and even greater worry about the problems the incoming leadership team under Xi Jinping will likely face over time.

Most people I met during a tour of Beijing, Shanghai and the interior city of Changsha thought China would avoid an economic “hard landing” this year, despite a sharp slowdown in growth during the last few months. But many were concerned about whether the new leadership could manage the restructuring needed to keep growth going beyond the next couple of years — a shift from export industries and infrastructure investment to consumption and services for a rising middle class.

Similarly, few people seemed to think that Xi’s ascension this fall would be derailed by the power struggle reflected in the recent purge of populist Chongqing governor Bo Xilai — possibly because, like most of the world, they don’t know what is happening behind the leadership’s closed doors. But a surprising preponderance of my sources talked about the necessity of political reform and improvements in human rights to preserve China’s stability as its economy slows and shifts. (My trip with several other journalists was sponsored by the private China-U.S. Exchange Foundation, which is chaired by former Hong Kong chief executive Tung Chee Hwa). Read more…

Jackson Diehl is deputy editorial page editor of The Post. He is an editorial writer specializing in foreign affairs and writes a biweekly column.

As published in on May 28, 2012.


By Martin Wolf

I sympathise with the Germans. This is not because I agree with their prevailing view of how the crisis occurred or what to do about it. I sympathise because the German elite were the ones who understood what creating the euro implied. They realised that a currency union could not work without a political union. But the French elite wanted, instead, to end their humiliating dependence on the monetary policy set by Germany’s Bundesbank. Now, two decades later, Germany’s partners, including France, have learnt a painful lesson. Far from being liberated from German control, they are now far more firmly under it. In a big crisis, creditors rule.

Consider how much better off Europe would have been if the exchange rate mechanism had continued, instead, with wide bands. Interest rates in the crisis-hit countries would probably have been higher and asset price bubbles and current account deficits smaller. When the turnround in financial flows occurred, currency crises would indeed have erupted. The Greek drachma, the Irish punt, the Portuguese escudo, the Spanish peseta, the Italian lira and, maybe, the French franc would have devalued against the Deutschmark. Price levels of these countries would have shown a temporary jump. But the blame for any fallout would have fallen overwhelmingly at home. I feared that the euro would weaken the sense of mutual trust, in a crisis, not reinforce it. So it has proved already, even though the eurozone has barely started the adjustment.

Why, then, do creditors rule in a crisis? The answer is simple: they can borrow cheaply. As lenders have fled from weaker credits, the interest rate on German Bunds has fallen to 1.3 per cent, against 5.8 per cent in Italy and 6.2 per cent in Spain. With flat nominal gross domestic products, countries with high interest rates are at risk of falling into a debt trap. They need help in controlling their costs of borrowing that only creditors can supply.

As Harold James of Princeton university, Ronald McKinnon of Stanford and many others have noted, Alexander Hamilton, the first US Treasury secretary, confronted a not dissimilar challenge with the debts incurred by the states in the American war of independence. Hamilton used the powers of the (second and centralising) constitution to assume these debts, issuing new federal debt, instead. In the long run, the modern US federal system emerged, with limits on state borrowing, a central bank (at the third time of asking) and a federal budget able to stabilise the economy. Read more…

As published in on May 22, 2012.


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.

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