About politicians and courage:

Courage is always missing in politicians. It is like saying basketball players aren’t normally short. It isn’t a useful attribute. To be morally courageous is to say something different, which reduces your chances of winning an election. Courage is in a funny way more common in an old-fashioned sort of enlightened dictatorship than it is in a democracy. However, there is another factor. My generation has been catastrophic. I was born in 1948 so I am more or less the same age as George W. Bush, Bill Clinton, Hillary Clinton, Gerhard Schröder, Tony Blair and Gordon Brown – a pretty crappy generation, when you come to think of it, and many names could be added. It is a generation that grew up in the 1960s in Western Europe or in America, in a world of no hard choices, neither economic nor political. There were no wars they had to fight. They did not have to fight in the Vietnam War. They grew up believing that no matter what choice they made, there would be no disastrous consequences. The result is that whatever the differences of appearance, style and personality, these are people for whom making an unpopular choice is very hard.

On Europe and the EU:

… Europe is a cultural space, which does not necessarily overlap with the EU as a physical space; otherwise there would be endless Israeli-style debates about where the frontiers should be. The EU is different, as it started its life as the European Economic Community with the idea that it was an open entity. Anyone could join if they conformed to the rules, the norms and the regulations. This was very easy to say in 1958 because most of Europe was in prison. You didn’t have to worry about whether you would have to take in Slovakia, because there was no risk, no prospect of that, thanks to the Russians. All you had to worry about were the wealthy countries of the West: either small, wealthy countries like Austria or big ones like Italy or Spain. After 1989 all this fell apart. The EU became legally, culturally and institutionally committed to expanding and accepting anyone who wanted to join from a space that could be recognised as Europe. Since no one defined that space, there was no limit. Turkey at the time was not a problem: first because in those years it was mostly a military dictatorship; and second, because it was on the other side of Yugoslavia and Bulgaria, and those two were not about to come into the EU.

Today we live in a very different situation. Europe is defined by the rules of the EU and its willingness to take in new countries. But already in the mid-1990s it was clear that no matter what anyone said in public, in private Brussels wanted to slow this process down, and if possible bring it to a stop. The reasons were very good, because the EU succeeded on the basis of genuine interstate co-operation, in which wealthy states or regions helped poor ones, and small new members could be forced to behave well. This was fine as long as the overwhelming majority of members were big and wealthy and the only likely new members were small, and either wealthy, or if poor, very small. When this changed in the 1990s, you started to hear people saying: ‘Wait a minute, Europe must be defined culturally, it must consider heritage: spiritual, architectural and linguistic heritage.’ This was simply a way of saying: ‘We can’t take in Muslims.’ Now, I did hear the Catholics say that Orthodox Christians can’t be accepted either. People would say this in Poland, in Croatia, to some extent in Hungary, but what they were really talking about were the Russians, the Serbs and the Romanians, not the Orthodox Christians in general. However, this could not be said openly, so once again the language was misused.

The concluding paragraph:

I think what we need is a return to a belief not in liberty, because that is easily converted into something else, as we saw, but in equality. Equality, which is not the same as sameness. Equality of access to information, equality of access to knowledge, equality of access to education, equality of access to power and to politics. We should be more concerned than we are about inequalities of opportunity, whether between young and old or between those with different skills or from different regions of a country. It is another way of talking about injustice. We need to rediscover a language of dissent. It can’t be an economic language since part of the problem is that we have for too long spoken about politics in an economic language where everything has been about growth, efficiency, productivity and wealth, and not enough has been about collective ideals around which we can gather, around which we can get angry together, around which we can be motivated collectively, whether on the issue of justice, inequality, cruelty or unethical behaviour. We have thrown away the language with which to do that. And until we rediscover that language how could we possibly bind ourselves together? We can’t come together on the basis of 19th or 20th-century ideas of inevitable progress or the natural historical progression from capitalism to socialism or whatever. We can’t believe in that anymore. And anyway, it can’t do the work for us. We need to rediscover our own language of politics.

The full article, in the London Review of Books, is here.

The crash of 2008 revealed the flaw in the euro’s construction, as each member country had to rescue its own banking system instead of doing it jointly. The Greek debt crisis brought matters to a climax. If member countries cannot take the next steps forward, the euro may fall apart, with adverse consequences for the EU.

Check out the full article here.

And while you are at it, have a look at Krugman’s column, The Making of a Euromess.

NYTimes A Balanced Global Diet: Global imbalances — roughly defined, the different emphasis the world’s leading economies place on savings, spending and debt — is a phrase much used and little acted upon.

Well before the current financial crisis began, world leaders pledged to address this disconnect. At an International Monetary Fund meeting in 2007, for instance, representatives of the United States and the European Union agreed they should change economic incentives to encourage more savings and less spending; officials speaking for China, Japan and Germany, meanwhile, pledged to take steps to encourage spending. At the end of the day, nothing much happened, and these imbalances helped grease the skids for the global decent toward the economic abyss.

This might not be readily apparent from current numbers; in fact, the financial crisis has contributed to a significant narrowing of global economic imbalances. Consumers in so-called “deficit countries” — states like the U.S., Britain, Spain and the countries of Eastern Europe that have huge trade deficits — are saving more as the crisis has exposed the dangerous extent of their indebtedness. Meanwhile, in China and other large export-driven economies, fiscal stimulus spending and some other policy moves have encouraged more domestic consumption.

The reduction in the U.S. current account deficit — the broadest measure of trade in goods and services — is particularly striking and serves as an example. This reduction holds true across other, less robust economies, too. Many of the emerging economies of Eastern Europe had easily financed wide deficits during the boom years. Now they find they are reducing private consumption in light of the lack of credit.

In more desperate cases like Ukraine and Kazakhstan, this has necessitated currency devaluation that boosts the costs of imports. Others, especially Eastern European countries in line for E.U. membership, have clung to their currency pegs. This leaves room for adjustment only via a sharp reduction in domestic demand.

Changing ingrained habits — whether the tendency is to be too thrifty, or too loose with money — is never easy. There is a powerful temptation to point at current trends and argue that rebalancing is taking place naturally. That would be a big mistake.

All evidence suggests that this rebalancing is temporary — the result of reactive policy measures among exporters and retrenchment among the profligate.

China, the world’s sovereign wealth machine over the past decade, is a case in point. My colleague, Rachel Ziemba, projects China’s current account surplus will likely narrow to $350-370 billion depending on the import trajectory, down from a record $420 billion in 2008. China’s trade surplus was just under $100 billion in the first half of 2009. A trade surplus of about $30 billion in the third quarter of this year is expected, which is well below 2008 levels. Increased spending at home rather than savings could further reduce the surplus. Yet with China reluctant to allow currency appreciation, reserve accumulation has resumed at a strong pace.

Although the export-oriented growth model has been shaken by the crisis, many countries seem reluctant to recalibrate. The beginning of inventory restocking has buoyed Asia significantly, as companies that cut back sharply have now increased output. Avoiding currency appreciation will exacerbate this trend, adding to reserve accumulation and distortions.

The most recent I.M.F. estimates — released in the October 2009 World Economic Outlook — suggest that imbalances could widen again but remain lower (as a share of G.D.P.) than their 2006 peak. Yet the dollar values of these imbalances could be very large.

In the I.M.F.’s forecast, China’s surplus will widen again in 2010, even as a retrenched U.S. consumer remains weak.

So who offsets the U.S. deficit? The I.M.F. suggests a diffusion of imbalances, where surpluses of Germany and Japan will remain in shrinking mode even in 2010, while the deficits of Canada and Australia, as well as emerging economies like Brazil, will offset the growth of China’s surplus.

However, the I.M.F. five-year projections also show a widening current account surplus for the entire world. This could suggest that some of the underlying export assumptions are too optimistic given the growth estimates.

Global imbalances are back on the policy agenda with the G-20 agreeing to create a peer review of macroeconomic policies including imbalances to avoid another crisis. The details are limited so far, but focus once again on an agreement that the U.S. will consume less and save more; Japan, Germany and China will spend more and will reallocate investment away from the export sector.

These are the right goals, to be sure. But a joint communiqué from a nascent international organization isn’t much to hang the world’s hat upon. The I.M.F. needs teeth, perhaps along the lines of the W.T.O.’s authority to prod member states toward “out of court” settlements, in order to enforce these difficult political and economic goals.

These imbalances represent serious misallocations of capital in domestic economies that, projected globally, raise the risks considerably of future financial crises and asset bubbles.

While imbalances did not cause the current financial crisis — I believe lax regulation bears a far greater onus — these imbalances certainly helped create the conditions for this crisis. Easy money and low long-term interest rates created an incentive to invest in seemingly-safe high-yield assets. An orderly unwinding of imbalances might put a lid on global growth during the adjustment, but is fundamental to achieve sustainable global growth.

Emerging Economies and the WTO
Ms. Mariarosaria Iorio of the International Gender and Trade Network (IGTN) thinks, among other things, that the fact that the insistence of emerging economies on keeping the Special Safeguard Mechanism (SSM) during the last Doha Round, an insistence that led to the breakdown of the round, shows that the world of trade policies is experiencing a geopolitical shift. This, she says, is certainly different from what happened during the Uruguay round that led to the formation of the WTO. I agree with her. Here is the paper (.doc)

SSM and South-South Trade
An ActionAid publication, supporting SSM, debunks the argument that SSM would discourage south-south trade. It addresses what it describes as false premises:

1. the South – South trade in agriculture comprises the bulk of world trade in agriculture

2. the countries of the south are either agricultural exporters or agricultural importers

3. SSM will be used frequently and indiscriminately by many developing countries

4. the inclusion of an effective SSM in the final Doha Round outcome will negatively affect the expected gains from agricultural trade liberalisation

5. South-South trade is an absolute good that must be pursued at all costs

The publication is here (.pdf)

From The Economist:

Though banking standards have certainly risen a lot in recent years, they still lag behind those of America and the European Union, particularly in terms of transparency. In April, United Bank for Africa, one of the country’s biggest, fell foul of American regulators who served the bank with a $15m fine for ignoring anti-money-laundering regulations despite several warnings. “There’s no resemblance at all between operating in Britain or America and operating in Nigeria,” says Fola Fagbule, a research analyst with Afrinvest. “It’s light years apart, and it’s an issue [the banks] need to address”. Read in full.