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West in political crisis has echoes of 1930s

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By Stella Dawson
Sun Jan 1, 2012 8:04am EST

(Reuters) – Dysfunctional politics threatens to deliver a protracted period of slow global growth, possibly lasting well beyond 2012, which will only deepen the political and economic problems for the West.

The global financial crisis that began four years ago has morphed into a political crisis for the United States and Europe. Leaders incapable of wrestling their debt loads to manageable levels or reviving strong economic growth are stoking turmoil in markets and populist unrest among the citizenry.

The political malaise is also hastening the shift of world economic power toward developing countries led by China. At worst, it could cause a second global recession bringing with it political upheaval on a scale not seen since the 1930s.

These unpalatable scenarios are being sketched by a growing number of leading political strategists, academics and economists after an extraordinary year when the once unthinkable came to pass: the United States had its credit rating downgraded while the developing world enjoys upgrades; Europe went cap in hand to Beijing for a financial bailout; and Brazil overtook Britain within the G7 club of major economies.

The shifting international economic order toward developing countries is nothing new. But it has been happening at a faster pace than expected, accelerated by what these analysts have begun describing as Western democracy in crisis.

They see a government credibility problem in the United States and European Union, stemming from a perception that the political elite is too closely tied to the financial elite in the West, and their collusion caused the financial chaos of 2007 and 2008 and its messy aftermath, leaving the average citizen burdened with higher public debt, higher taxes, unemployment and austerity programs.

Left to pay for what voters see as the elite’s mistakes, public confidence in government has been undermined, and political paralysis has set in as Western leaders struggle to pull governmental levers that are not working effectively.

In contrast, developing nations have been modernizing their institutions and markets, delivering growth rates in the past decade triple those of the West. By 2020, the Centre for Economics and Business Research in London estimates that India and Russia will have joined China and Brazil in the G7 ranks as the biggest economies in the world based on total GDP output, ousting Britain and France. Only the United States, Japan and Germany will be left from the old G7 that dominated the international order since World War II.

Niall Ferguson, a prominent economic historian now at Harvard, calls this an historic power shift.

“For the better part of 500 years, it was Westerners on both sides of the Atlantic who could say that they had the best economic system, that they developed the best political system and so forth. And those claims have sounded increasingly hollow in our time,” Ferguson said in an interview.

The breakdown in public confidence caused by the financial crisis has revealed a deeper problem. “What we’re seeing in government is part of a wider crisis of Western institutions,” he said.

The Tea Party movement in the United States, the Occupy Wall Street movement and riots in Europe all are populist expressions of this breakdown of trust. Institutionally, it is reflected in a U.S. Congress deadlocked over taxes and spending with lawmakers so polarized by different narratives on the causes and fixes for the financial crisis that it is nearly impossible to reach decisions, even though both sides recognize that if left unchanged, their policies will bankrupt the nation, he said.

In Europe, leaders lurch from summit to summit, making partial decisions on fixing a debt crisis and trying to save the 17-member monetary union. But in the process the political elite in Brussels and the capitals are losing touch with their democratic base, which is uncertain it wants to pay the price required for monetary union through deep cutbacks.

Heather Conley, a former U.S. Under Secretary of State for European Affairs and now a senior fellow at the Center for Strategic and International Studies, said this near political paralysis seen in the United States and Europe is common when governments are at an inflection point.

“Without decisive direction and leadership, we march in place or attempt to muddle through, uncertain of which path to take. The West is at such a moment,” she said.

“Only an external shock I fear will force us to take the uncertain (new) path. Or we will become so frustrated that the West will choose leaders who will take us in a radically new direction. I’m not sure our frustration level has reached that level, yet. But Europe may be arriving there soon.”

Governments in Greece, Italy and Spain have collapsed or been voted out of power in the past year, and 2012 brings presidential elections in the United States, France and Russia.

ASIA NOT IMMUNE

The fall-out from Europe’s debt crisis is being felt far and wide.

Japan already has endured nearly two decades of lost economic growth and weak political leadership after its financial bubble collapsed in the early 1990s.

George Friedman, geopolitical strategist and chief executive of Stratfor Global Intelligence, sees a distinct risk that China too will join the club of countries in political stalemate, subdued or stalled growth and popular unrest – with potentially serious consequences.

“When the United States, Europe and China go into a crisis of this sort, it can reasonably be said that the center of gravity of the world’s economy and most of its military power is in crisis. It is not a trivial moment,” Friedman wrote in “Dominoes of Doom” on the website EconomyWatch.com.

China’s economy, heavily dependent on exports, is slowing fast. Officials described the global economic outlook as “extremely grim” last month after its annual work conference, signaling deep concern as China enters a year of leadership change.

The Chinese government responded to the global recession spawned by the 2007-2008 financial meltdown with a massive credit expansion that has stoked inflation and fed a property boom. It also increased controls on the economy through state-owned companies, further concentrating state power, which Friedman sees as politically destabilizing as growth slows down.

Witness the past month villagers in southern China in a 10-day standoff with public officials over land expropriation, thousands marching in Haimen city to protest a power plant and a worker sit-in in Dongguan city demanding back pay after their paper plant closed.

ENDING PARALYSIS

The best that can be hoped for in 2012 is a muddling through, where economic growth in the United States averages around 2 percent compared with zero in the euro zone, analysts said. World growth, buoyed by emerging markets, looks set to average around 3 percent.

Martin Sass, founder of the New York based hedge fund M.D. Sass with $7.5 billion under management, is among those pinning his hopes on the elections breaking the stalemate. “I never expected the level of dysfunction in the U.S. and European lawmaking … and I never saw fundamentals count for so little in the stock market. Politics and contagion were the drivers of this underperforming market, not balance sheets and earnings.”

“It is going to take a new election in November (in the United States) to get any legislation through to deal with our problems,” Sass said.

If the political system starts functioning effectively again, Mohamed El-Erian, chief executive officer at PIMCO, the world’s largest bond fund, said it’s not too late for policymakers to catch up and avert serious economic downturn.

But elections alone may not prove the answer. To break the paralysis, political leaders need to offer a new vision, one that rebalances the cozy linkage between finance and politics, otherwise the credibility of the political system will remain compromised, said Scheherazade Rehman, professor of international affairs and finance at George Washington University.

“There has to be a shifting of our institutions. The banking system is at the heart of our economic system and with it extraordinary ties to the political system. We have to rethink the close relationship that caused the breakage,” she said.

The political crisis shot to the foreground this year as voters lost confidence in how governments responded to the 2007-2008 financial crisis, global recession and the resulting explosion in sovereign debt levels. Two narratives have emerged of what went wrong. The left casts the banker as the prime villain, unpunished by the political elite who allowed CEOs to violate all the principles of fiduciary and moral responsibility in pursuit of personal gain, which fuels the perception of a political system in collusion with a criminal financial elite it is unwilling to punish.

The right-wing narrative casts big government as the villain for exploiting the crisis to expand its regulatory powers that intrude on free markets, and to spend money on huge bailouts and social welfare programs that have only exploded the budget deficit.

In both narratives, the victim is the average citizen who is left paying a gigantic bill – through high unemployment, higher taxes and lost economic opportunity. Either way, the compact between political governance and economic life has broken.

“The political reaction, whether big government is seen at fault or big business, the reaction is that the system is tainted and there is too much crony capitalism at work,” said Raghuram Rajan, finance professor at the University of Chicago and former International Monetary Fund chief economist.

There is a distinct possibility that political dysfunction will continue well after the 2012 elections – held in May for France and November for the United States, while China completes its leadership handover by the spring of 2013.

In the United States, voters could return a divided and polarized Congress again, continuing the legislative standoff. One-party rule may prove little better, if the path chosen toward budgetary discipline is excessive taxation or ultra-steep budget cuts. In France, the election winner’s relationship with Germany and fellow EU leaders will prove critical.

Although Western democracy has demonstrated the flexibility to reform when facing severe challenges, the shadow of the 1930s looms large. This uncertainty over whether strong political leadership can emerge in 2012 is haunting markets.

John Browne, senior economic consultant to Euro Pacific Capital, is among the pessimists. He told clients in his year end note that American and European Union politicians have shown utter unwillingness to take tough decisions they know should be enacted to avoid looming global economic disaster.

“With an estimated $6 trillion plus solvency shortfall of the euro zone banks, and $16 trillion in U.S. public debt, it will take leadership of far greater caliber to avert a disaster. Such leadership is nowhere in sight,” he said.

(Reporting By Stella Dawson; editing by Claudia Parsons)

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US Africa Command looks to strengthen role in region

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By John T. Bennett
09/22/11 09:00 PM ET

The U.S. Africa Command is making changes that show it is taking on a vital role on a volatile continent, a shift etched in stone when it led the early weeks of the Libya military campaign.

Before Libya, the still-young command “never thought of itself as leading [offensive military] operations” said Army Gen. Carter Ham, its commander.

The command was established in 2008 and was long thought to be best shaped for training African nations and “building their capacity” to maintain stability.

But the command’s first leader, Army Gen. William “Kip” Wald, believed the United States would eventually need an AfriCom that could undertake more traditional military operations, and he moved his command in that direction, Ham said.

Ham has continued that shift, and has made it clear he intends to keep it going by, among other things, adding many more special-operations forces.

In Libya, AfriCom led the opening weeks of the operation, as U.S. and NATO warplanes and cruise missiles pounded Moammar Gadhafi’s regime. Ham said the operation showed that every U.S. military combatant command must be able to conduct “the full spectrum of operations,” which to the Pentagon includes diplomatic talks, humanitarian relief work, training of indigenous troops and combat operations.

The command had to quickly figure out how to do such things as assist with Tomahawk missile strikes from U.S. Navy ships. AfriCom officials had to bring in and manage a range of systems including fighter jets, intelligence and surveillance aircraft and aerial tanker planes.

Giving AfriCom the permanent ability to do “kinetic targeting” was one of the lessons learned. That kind of precise bombing was not something AfriCom previously had been required to do, Ham said. But the command picked it up “pretty quickly,” he said.

“The question for us now is, how do we sustain that so that if we would have to do this again we start at a higher plateau than we were previously?” he said.

The AfriCom chief also said he would welcome more special-operations forces to conduct a range of missions, including training African forces.

“The demand for special-operating forces of lots of different flavors is pretty significant in Africa,” Ham said.

“I’d like more special-operations forces now,” he added bluntly. While incremental increases for now are possible, he said he would not expect larger increases until decisions on troop levels in Afghanistan are finalized.

Ham was careful to note that U.S. special operators would mainly be conducting training missions — “not conducting operations — that’s for the Africans to do.”

Still, any talk about sustaining the ability to run a conflict as hot as Libya and increasing the number of American commandos in Africa is a shift from the Bush administration’s initial sales pitch.

Anthony Cordesman, a former Pentagon intelligence official now with the Center for Strategic and International Studies, acknowledged AfriCom is changing.

“Part of the problem is it was established for political visibility — so its initial public profile was largely political,” Cordesman said.

But AfriCom’s commanders have been forced to make changes due to developments on the ground.

“The world doesn’t exist to respond to a command,” Cordesman said. “Commands exist to respond to the world.”

And since Africa Command was set up, al Qaeda and other extremist groups such as al Shabaab have stepped up their actions in the continent, Cordesman noted.

“The question that must be answered” about an AfriCom with more in-house offensive combat power and expertise is “Will it be useful?” Cordesman said.

“If you already have it in place” when situations such as Libya lead U.S. leaders to determine a military strike is necessary, Cordesman said, “then you’re lessening the burden on the taxpayer — being pennywise and pound-foolish doesn’t get the country anything.”

The stakes for the United States in Africa are high.

For one thing, the United States is more dependent on Africa for oil than the Middle East.

“America gets approximately 18 percent of all of its hydrocarbon imports and the majority of [other fuel sources] from Africa,” Johnnie Carson, assistant secretary of State for the Bureau of African Affairs, said Monday during a conference in National Harbor, Md. “Nigeria, Africa’s largest oil producer, supplies close to 8 percent of all the U.S. imports — a figure that’s equivalent to what we get from Saudi Arabia.”

A majority of the liquefied natural gas used on the East Coast of the United States comes from Africa, which over the next decade is expected to provide 25 percent of the oil and natural gas that the United States imports annually, Carson noted.

America’s top rival, China, has over the past decade established a presence in Africa.

In addition to the Islamic extremist groups operating out of African nations, Carson noted the naval pirates interfering with commercial ships off the continent’s shores.

“What happens in Africa affects the United States and the entire international community,” Carson said. “For all these reasons and more, President Obama has made Africa one of our top foreign-policy priorities.”

The Obama administration’s objective, Carson said, is to fashion an Africa that is “more stable” in 20 years and “more supportive” of the United States.

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BOEMRE: Official lashes out at ’sniping’ over oil drilling permit delays

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by: Amanda Carey

Earlier this week, Michael Bromwich, Director of the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) lashed out at critics of his agency’s dealings with offshore drilling permits since the BP oil spill last year.

It was during a speech at the Center for Strategic and International Studies, and Bromwich was quite put out. “What was destructive, corrosive and not done in good faith was the sniping from certain public officials and industry trade associations,” he said.

“They claimed, and some continue to assert, that we had imposed a ‘de facto’ moratorium or created a ‘permitorium’ that was blocking the issuance of drilling permits,” Bromwich continued. “Not because the applications had failed to meet all the requirements, which was the fact, but supposedly because we had made politically motivated decisions not to issue them. That could not have been further from the truth, but it was repeated often enough that people who should have known better came to believe it.”

In mid-February, the first Gulf of Mexico drilling company declared bankruptcy. And according to the Texas-based Seahawk Drilling’s CEO Randy Stilley, the decision to file for Chapter 11 came after the company’s revenue stream had “been adversely affected by the dramatic slowdown in the issuing of shallow-water permits in the U.S. Gulf of Mexico following the Macondo well blowout.”

At the behest of a bipartisan group of lawmakers and fed-up industry officials, BOEMRE and the Department of Interior issued the first permit for deepwater drilling in the Gulf of Mexico on March 1. Since then, then agency has issued a handful of permits for drilling in the Gulf.

But one industry official isn’t taking Bromwich’s rebuke sitting down. In a statement, Jim Adams, President and CEO of Offshore Marine Service Association, slammed the director, saying “Bromwich should spend less time trying to silence public criticism and more time actually approving drilling permit.”

Adams then asserted that Bromwich should “get his story straight,” noting that Bromwich says permits are not being delayed, but also claims Congress has not provided the sufficient funds the department needs to approve the permits.

“The bureaucratic double-talk would be laughable if thousands of Gulf workers weren’t sitting idle, or if Americans weren’t paying $4 a gallon for gasoline,” said Adams. “There’s a way Bromwich could stop the criticism that seems to bother him so much. He could simply do his job.”

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