The conquering of the euro crisis seems like something out of a fairy tale. Faced with a gut-wrenching peril, our hero closes his eyes and chants an incantation: "Whatever it takes!" Suddenly, once-insurmountable troubles melt away and everyone lives happily ever after.
So what happened? Was it all in our minds? Was the episode anything more than a panicked bunch of bond traders, stampeding toward a precipice but now safely pacified and redirected?
As last summer turned into fall, Italy and Spain were wobbling. The two countries -- the third and fourth largest economies in the eurozone -- saw their bonds shunned by global investors. For the heavily indebted pair, a bond sell-off meant that interest rates rose and disaster loomed. At some point, the high price of borrowing would become unbearable. The eurozone nations had gathered funds to try to avert a crisis, but the sum would not be enough to cover the needs of such large member economies.
Then Mario Draghi, head of the European Central Bank, stepped in to save the day. He announced that the ECB would do whatever it took to save the currency. If extra funds were needed, the ECB would provide them through a program it called Outright Monetary Transactions -- the unlimited purchase of troubled nation bonds once those countries asked for help.
The effect of his announcement was dramatic. Bond yields fell as buyers relaxed. While the previous bailout fund might have been limited, the ECB's ability to print money and buy bonds was not. The restoration of calm was so successful that the ECB did not have to actually do a thing -- the mere announcement that it was willing to act relieved the pressure on Spanish and Italian borrowing.
It is hardly a novel idea to think that a dangerous market panic could be settled by words alone, so long as those words were credible and uttered by the right person. So, do we mark this up as an instance of judicious intervention? A daring move by Mario Draghi that saved the European project and merited his selection as the Financial Times' Person of the Year?
Maybe. The problem is that the sovereign debt problems plaguing Spain and Italy were only one part of a multi-dimensional crisis. The other problems remain, two in particular. First, the untenable contradictions of the eurozone's approach to banking have not been resolved. Second, the beleaguered countries along the eurozone's periphery are being asked to endure potentially unbearable levels of unemployment and economic stagnation.
The banking problem can seem the most obscure part of the problem. Yet as the global financial crisis demonstrated, the provision of credit is the lifeblood of an economy. Cut off credit and economic asphyxiation sets in quickly. Europe's additional discovery was that, in a single currency zone, money could flow very rapidly from any bank perceived as risky to others perceived as safe. Any hint that a bank's host country might leave the euro or that the bank might have gorged itself on dubious sovereign debt would be enough to start the exodus of funds. No funds, no credit, no economic activity.
Eurozone leaders resolved to fix this with a banking union. And then they ran into politics. Banking regulation is sensitive. There was little appetite for ceding control. Last week, discussing a recent bilateral move by France and Germany to coordinate their banking policies, the Financial Times' Wolfgang Münchau wrote:
"My suspicion is that the ultimate intent of the Franco-German legislation is to secure the position of their national champion banks ... The most important signal sent by the unilateral legislation in France and Germany is the lack of political will to sort out the banking mess, which is at the heart of the eurozone crisis. Instead, governments are seeking refuge in symbolic gestures ... The renationalisation of banking means that the monetary union is as unsustainable today as it was in July last year -- and now the policies needed to fix this problem have been abandoned."
This was one danger of Draghi's move. By alleviating the sense of impending doom, he also may have undermined the impetus for overcoming entrenched opposition to reform.
The growth and unemployment situation is not much better. A story this week, contrasting positive Spanish sentiment with dismal performance, detailed the economic turmoil in the country:
"...in the last quarter of 2012 ... the number of companies declared bankrupt soared by almost 40 per cent to 2,584. It was the highest number since the crisis began, suggesting that the situation for credit-starved Spanish companies is not only getting worse -- but getting worse faster than before ... Nor has there been any sign of a turnround in Spain's dismal unemployment numbers, which continue to rise towards 6 million, or more than 26 per cent of the workforce ... The IMF expects a drop in GDP of 1.5 per cent this year -- a worse recession than in 2012."
We also come upon another danger of Draghi's move: By restoring confidence in the euro, he paved the way for the currency to rise, which did no favors for eurozone exporters. That's hardly the cause of Spanish economic woes, but it is no help, either.
And then, as always, the democracies of Europe have politics. Spain's governing party is caught up in a political scandal. Italy is moving back to electoral politics after a technocratic interlude. It is not clear that difficult political choices will get much easier in either case.
The list of eurozone perils is alarmingly long. Yet a remarkable sense of calm prevails in the markets. Perhaps this will be a crowd-pleasing story book ending, the sort in which impossible obstacles are overcome and everyone goes home happy. Or perhaps it will be the kind of story one rarely sees out of Hollywood, in which our blissful hero opens his eyes, only to find that he had dreamt his salvation and the threats remained, more menacing than before.
DANIEL ROLAND/AFP/Getty Images
President Obama's apparent selection of his current chief of staff, Jack Lew, to be the next Treasury secretary reflects some interesting choices. One that has received ample attention is the choice between a denizen of Pennsylvania Avenue versus someone from Wall Street. The Washington Post led with this facet of the selection:
"President Obama recently said he would love to hire a top executive into his administration. But for the job of Treasury secretary, he didn't pick a corporate executive, a famous economist or a former politician -- he has decided to tap a trusted adviser ... an expert on the nation's ongoing budget wars."
Given Lew's budget expertise and his background at State, the president had no need to choose between domestic and international qualifications for the post, but his limited time in the private sector is different from the background of some financial titans who have previously held the job.
The most interesting choice, though, may have been between insider and outsider. Here the choice of Lew stands in contrast to the selection of Sen. John Kerry (D-MA) for State. Whereas Kerry's prominence comes from his chairmanship of the Senate Foreign Relations Committee and his candidacy for president, Lew's top positions (including his directorship of the Office of Management and Budget) have been in the Executive Office of the President, serving the president.
The Treasury secretary job is so broad that any nominee would be lacking experience in some dimension -- financial markets, international dealings, budget and political matters. That can be at least partially offset by a willingness to listen to broadly, and listen closely to the right people. It may be significantly harder to suppress strong tendencies to carry out the president's wishes and risk confrontation through presenting a contrary view. The Wall Street Journal expressed some skepticism about Lew in this regard.
It is not clear how much this independence, or lack thereof, will matter at the margin for international economic policy (loosely defined as those matters on which Dan Drezner and I wager). From the outset of the Obama presidency, Treasury and State officials privately acknowledged the necessity of moving ahead with the three pending free trade agreements. One could hardly doubt Secretary Clinton's independence or willingness to voice her views. Yet the completed agreements took almost three years to pass.
When it comes to the second term agenda of concluding Trans-Pacific Partnership talks, launching and completing a U.S.-EU. free trade agreement, or making progress at the WTO, the next secretaries of Treasury and State will have a major role to play, but the domestic political obstacles loom large. These agreements are broader than the formerly-pending free trade agreements, they are not pre-cooked, they present more challenges in international negotiation, and they may face equal or greater domestic political obstacles. To overcome all this, Lew and Kerry will need to be even more adept than their well-qualified predecessors.
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By Ambassador Roger F. Noriega and José R. Cárdenas
Last week, ahead of President Obama's meeting with the Business Roundtable, the Roundtable and the U.S. Council for International Business released a report saying that, "the success of American companies, and of the U.S. workers they employ, increasingly hinges on their success as globally engaged companies."
Indeed, there is some optimism in Washington that President Obama, free from political constraints in his second term (i.e., Big Labor opposition to free trade), can implement a robust international trade agenda as a sure-fire way to create new jobs at home, markets for U.S. goods and services, and investment opportunities abroad. Much of that talk is focused on action regarding the Trans-Pacific Partnership and a trans-Atlantic free-trade agreement with Europe.
We have just co-authored a paper for the American Enterprise Institute -- "An action plan for US policy in the Americas" -- the essence of which can be distilled down to the following: Mr. President, stop ignoring Latin America!
If the President's objective is to use trade to help jump-start the U.S. economy and create more jobs here at home, then Latin America has to be part of the equation. That's because when you look beyond the rogue behavior of Venezuela's Hugo Chávez and his populist ilk, clearly the Western Hemisphere is home to some of the most dynamic markets in the world.
Since 2003, an estimated 73 million Latin Americans have risen out of poverty. Moreover, between then and 2010, the average Latin American income increased by more than 30 percent, meaning that today nearly one-third of the region's nearly 570 million population is considered middle class. And in just the next five years, regional economies are projected to expand by one-third.
Given the Americas' close historical, cultural, familial, and geographic ties, linked by common values and mutual interests, what that means for U.S. businesses is millions of new consumers with an ingrained affinity for U.S. goods and services.
Greater economic integration will also create momentum to deal with other challenges in the region, from security issues to modernizing immigration policy -- not to mention rendering obsolete once and for all the retrograde populist agendas of some who prefer looking to the past rather than the future.
It's time that U.S. policymakers dispensed once and for all with Old Think when it comes to Latin America: that is, what is it the U.S. can do for the region. Today, it is what we can do together to benefit all the peoples of the hemisphere and boost our own recovery and competitiveness. If President Obama is to pursue an aggressive trade agenda in his second term, the incentives are powerful for a fundamental reassessment of relations right here in our own hemisphere.
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There has been a lot of commentary on the Obama administration's "pivot" (or "rebalance") to Asia here at Shadow Government. Most commentators have praised Secretary Clinton's activism towards Southeast Asia, but pointed out that the rhetoric of the pivot will look hollow without a real trade strategy and adequate resourcing for our forward military forces. This past month it looks like the wheels may have started coming off on the trade strategy axle.
In early September regional leaders met at the Asia Pacific Economic Cooperation (APEC) leaders meeting in Vladivostok, sans Barack Obama who was unwilling to skip town in election season, and courtesy of Vladmir Putin who was unwilling to schedule the meeting at a time the U.S. President could attend. President Obama's absence was not the end of the world: Bill Clinton skipped two APEC summits and managed to compensate the next year (for the record, George W. Bush missed none...but that was before we were "back in Asia" as the current White House likes to say). The real problem at Vladivostok was the hallway banter by the other delegates about TPP -- the Trans-Pacific Partnership -- that forms the core of the administration's strategy for building a regional economic architecture that includes us and strives for WTO-consistent trade liberalization and rule-making. The overall critique in Vladivostok was that the U.S. side is playing small ball on TPP, to the frustration of multiple stakeholders. The U.S. business community is worried at the lack of market access in the negotiations; the Australians and Singaporeans are hedging with Asian-only negotiations because of what they see as incrementalism by USTR; and Japanese officials are dismayed by administration signals discouraging Tokyo from expressing readiness to join TPP.
This all matters because of the other summitry gossip that is coming out of Asia. On November 18-20, the Cambodians will be hosting the East Asia Summit, which President Obama joined with great fanfare last year and which the president will be able to attend this year because it is after the U.S. elections. The main deliverable on economics at that summit will be a decision within the region to proceed with the RCEP -- an Asian "Regional Comprehensive Economic Partnership" that includes the ten ASEAN states, Japan, China, Korea, India, Australia and New Zealand -- and does not include the United States. The Cambodians' current plan for the November summit is to hold an RCEP inaugural meeting while President Obama waits outside the room cooling his heels with Vladmir Putin (since Russia is also not included in the regional trade deal). Stunningly, our allies Japan, Australia ,and Korea all appear to be on board with this scenario.
At one level this resembles the silliness of a junior high school prom, but at another level it could be the moment people start writing the obituary for the "pivot." To prevent that, a returning Obama administration or a new Romney administration has to put more oomph into the current anemic U.S. trade strategy. The RCEP launch will be embarrassing, but since those talks have no prospect of hitting a WTO-compliant level of trade liberalization, the United States can retake center stage again by showing that it can form an even more impressive coalition of trade liberalizing states. This means getting Japan in to TPP; leveraging Canada and Mexico in the TPP process (which will also help us counter Brazilian efforts to separate South America from us); and beginning to move on a complementary trans-Atlantic FTA process. The "pivot" was never sustainable without like-minded allies in our hemisphere and Europe and now is the time to recognize that and develop a strategy accordingly.
The next administration will also have to demonstrate credibility by moving to secure trade promotion authority (TPA) from the Congress (just can't get around Article One Section Eight of the Constitution). Finally, the administration had better start thinking about new ways to engage on economic issues within the EAS that keep us in the regional dialogue without requiring a high-standard FTA with countries like Laos or Burma. Bob Zoellick was a master of that art at USTR when he pioneered the Enterprise for ASEAN Initiative -- a flexible framework that allowed a la carte participation by countries ranging from an FTA (Singapore) to establishing very basic economic dialogues (Cambodia).
In short, for trade to continue underpinning U.S. leadership in Asia, we will have to go global, be agile within the region, and give a shot of adrenaline to USTR. Otherwise, the "pivot" will be a minor footnote in the textbooks.
ALEXANDER NEMENOV/AFP/Getty Images
Over the past decade, Washington's Taiwan policy has created unnecessary dilemmas for Taiwan's political leadership. On the one hand, if a president of Taiwan is considered too provocative toward China, Washington, rightfully irritated over undue tensions, will freeze relations with the democratic island. On the other hand, if a president of Taiwan reconciles with China, Washington's impulse is to neglect relations, confident that the cross Strait "problem" is resolving itself. It's a small wonder why many Taiwanese believe that Washington is unreliable.
President Chen Shui-bian faced the former from Washington. While no one in Taiwan doubted that he would protect Taiwan's de facto independent status and its hard won democracy, or fight for its international dignity, he lost the confidence of Washington and then his own people when relations with both China and the United States soured.
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One year ago, who could have imagined that the most significant international gesture of the year on behalf of freedom in China would come not from the United Nations, the United States, or another government, but from an internet search company? Such was Google's principled decision this week to follow through on its earlier threat and withdraw from China rather than acquiesce in continued Chinese government control. Beijing reacted with predictable bluster, but I suspect the Politburo leaders were stunned when Google called their bluff and chose to lose access to the most potentially lucrative emerging market in the world rather than keep censoring itself. Google's concern was not just China's restrictions on its search results but, more ominously as my FP colleague Blake Hounshell highlighted, the co-opting of Google technology to use in surveillance and entrapment of political dissidents (not to mention from a commercial standpoint the potential theft of sensitive intellectual property). No longer was Google just complicit in restricted information flow; it was now potentially a new tool for the persecution of Chinese activists.
This recalls another recent landmark moment in the turbulent encounter between Chinese state capitalism and Western technology companies, but with a less happy outcome. The Chinese Government's overconfident posture towards Google likely drew inspiration from Yahoo's shameful capitulation to the Public Security Bureau in 2004 by turning over Chinese dissident Shi Tao, whose only "crime" was using his Yahoo email account to communicate with overseas Chinese democracy activists. Shi Tao is currently serving a 10-year prison sentence.
Yahoo publicly admitted its role in late 2005. I was working at the National Security Council at the time, and shortly after Shi Tao's arrest, some NSC colleagues and I met with a senior Yahoo executive to get their side of the story. It was a thoroughly disillusioning meeting. The Yahoo exec maintained a defiant, defensive posture, clinging to the talking points that Yahoo was just following the local laws in the country it was working in, couldn't get involved in a "political case" like this, and besides didn't U.S. Government policy encourage economic engagement with China? To which we reminded him that U.S. policy also encouraged human rights and free speech in China, which Yahoo's actions directly undermined. Perhaps even more distressing was that the Yahoo exec made clear that his company felt no obligation, even in private, to remonstrate with the Chinese authorities over the arrest or to do anything to assist Shi Tao or his family. It was not an auspicious moment for the argument that Western technology companies will inevitably bring freedom to China. Following months of bad publicity and Congressional pressure, Yahoo eventually reversed course and expressed remorse.
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If the standard for this award is, “what person has had the greatest impact on global affairs,” it would have to beat President George W. Bush. If there is any doubt, the fact that President Obama still campaigns against his predecessor should put it to rest. President Bush, like President Truman, served at a time of extraordinary consequence and his legacy dominates the decade.
General David Petraeus. It is not just that he helped develop the new counter-insurgency strategy and troop surge that pulled Iraq back from the brink -- and for that policy and decision, President Bush and a small band of others also deserve significant credit. It is that Gen. Petraeus demonstrated that in the midst of a losing strategy, the U.S. military is capable of profound adaptation, institutional learning, and change of strategic direction in order to secure victory. This prevented the United States from possibly losing a war for only the second time in our history. And laid the foundation for the counter-insurgency strategy being implemented in Afghanistan today.
Former President George W. Bush. He was so polarizing that by the end of the decade, it was possible to win a Nobel Prize just for not being him. But he was at the center of the era's tumultuous events and it is becoming clearer that a number of his most controversial foreign policy stances -- wars in Iraq and Afghanistan, Guantanamo, and negligible progress on global environmental accords, for example -- were less tied to his idiosyncratic approach than his critics once believed. ?
The American serviceman. The U.S. military has been in combat for nearly all of the decade. In Iraq, Afghanistan, and elsewhere, soldiers, sailors, airmen and Marines have repeatedly served in roles for which they were not trained, filling in for State Department and U.S. Agency for International Development personnel who have been all too scarce in combat theaters. In the process, today’s military has become the most skilled and experienced in recent memory. Contrary to predictions on the Left, the All-Volunteer Force remains healthy: this year, for the first time in 35 years, the U.S. military met all of its annual recruiting goals.
My "person" of the decade is in fact a sort of person -- the entrepreneur. At a time when the failings of certain big businesses make headlines, it is important to take note of the?individuals whose restless creativity and innovation drive economic progress. Entrepreneurs bear large personal risks in the face of uncertain rewards, but their successes underpin American economic leadership, transform the way we live, and contribute significantly to global development. In places like Iraq, Afghanistan, and the West Bank, entrepreneurs will be vital to sparking private sector growth. As the United States crafts its response to the economic crisis, it is vital that entrepreneurship and innovation be encouraged, not stifled.?
Hamid Karzai. He has remained at the top of his tumultuous and pivotal country despite assassination attempts, corruption, and criticism from his American sponsors. It should not be forgotten that he was hailed as a hero for unifying Afghanistan for the first time in nearly 30 years.
Shadow Government is a blog about U.S. foreign policy under the Obama administration, written by experienced policy makers from the loyal opposition and curated by Peter D. Feaver and William Inboden.