Re-Orienting America

Richard N. Haass


NEW YORK – Some 40 years ago, when I entered Oxford University as a graduate student, I declared my interest in the Middle East. I was told that this part of the world came under the rubric of “Oriental Studies,” and that I would be assigned an appropriate professor. But when I arrived for my first meeting at the professor’s office, his bookshelves were lined with volumes bearing Chinese characters.

He was a specialist in what was, at least for me at the time, the wrong Orient.

Something akin to this mistake has befallen American foreign policy. The United States has become preoccupied with the Middle East – in certain ways, the wrong Orient – and has not paid adequate attention to East Asia and the Pacific, where much of the twenty-first century’s history will be written.

The good news is that this focus is shifting. Indeed, a quiet transformation is taking place in American foreign policy, one that is as significant as it is overdue. The US has rediscovered Asia.

Rediscovered” is the operative word here. Asia was one of the two principal theaters of World War II, and again shared centrality with Europe during the Cold War. Indeed, the period’s two greatest conflicts – the wars in Korea and Vietnam – were fought on the Asian mainland.

But, with the end of the Cold War and the demise of the Soviet Union, Asia receded from American interest. In the first decade of the post-Cold War era, the US trained much of its attention on Europe. American policymakers focused primarily on enlarging NATO to encompass many of the former Warsaw Pact countries, and on contending with the post-Yugoslav wars.

The second phase of the post-Cold War era began with the 9/11 terror attacks. What followed was a decade of US focus on terrorism and the large-scale commitment of American military forces to Iraq and Afghanistan. The two conflicts have claimed more than 6,000 American lives, cost more than $1 trillion, and consumed countless hours for two presidents and their senior staff.

But now this phase of American foreign policy is ending. President Barack Obama has announced that US armed forces will be out of Iraq by the end of 2011. In Afghanistan, US force levels have peaked and are declining; the only questions concern the pace of withdrawal and the size and role of any residual US military presence after 2014.

This is not to argue that the Middle East is irrelevant or that the US should ignore it. On the contrary, it is still home to massive oil and gas reserves. It is a part of the world where terrorists are active and conflicts have been common. Iran is moving ever closer to developing nuclear weapons; if it does, others may well follow suit. And it is a region now experiencing what could prove to be historic domestic political upheavals. There is also the unique American tie to Israel.

Nevertheless, there are grounds for the US doing less in the greater Middle East than it has in recent years: the weakening of al-Qaeda; the poor prospects for peacemaking efforts; and, above all, the mounting evidence that, by any measure, massive nation-building initiatives are not yielding returns commensurate with the investments.

At the same time, there are strong arguments for greater US involvement in the Asia-Pacific region. With its large populations and fast-growing economies, it is difficult to exaggerate the region’s economic importance. American companies export more than $300 billion in goods and services to countries in the region each year. Meanwhile, Asian countries are a critical source of investment for the US economy.

Maintaining regional stability is thus critical for US (and global) economic success. The US has multiple alliance obligations – with Japan, South Korea, Australia, the Philippines, and Thailand – which are needed, in part, to deter North Korean aggression. Moreover, US policy must create an environment in which a rising China is never tempted to use its growing power coercivelywithin or outside the region. For this reason, recent US efforts to strengthen ties with India and several Southeast Asian countries make good sense.

The US is right to shift its focus from the Middle East to the Far East. The good news is that this conclusion seems to be shared across the US political spectrum. Mitt Romney, the likely Republican nominee for president, pledges to increase the rate of shipbuilding – a commitment linked to an increased US presence in the Pacific. And US Secretary of State Hillary Clinton speaks of America pivoting away from the greater Middle East: “The world’s strategic and economic center of gravity is shifting east, and we are focusing more on the Asia-Pacific region.”

Regardless of whether the twenty-first century will be anotherAmerican century,” it is certain that it will be an Asian and Pacific century. It is both natural and sensible that the US be central to whatever evolves from that fact.
Richard N. Haass, a former director of policy planning in the US State Department, is President of the Council on Foreign Relations.

European Ponzi Goes Full Retard As EFSF Found To Monetize... Itself

Submitted by Tyler Durden

on 11/12/2011 21:33 -0500

We have long mocked and ridiculed the Fed for being the ultimate ponzi instrument: after all, why worry, when your central bank will buy up almost three trillion in US paper in about 2 years (a very comforting fact for US politicians who never have to fear that those trillions in new porkbills, pardon fiscal stimulus programs, may end up without funding). Well, as it turns out those wily veteran bankers from across the Atlantic have just one upped America yet again. According to the Telegraph, the abysmal, and barely successful, 3 EUR billion issuance of EFSF bonds (which was originally supposed to be 10 EUR billion, on its very very gradual climb to 1 EUR trillion) had one more very curious feature to it, aside from confirming that it is Dead On Arrival as expected. It turns out that in addition to being the most convoluted and complex creation ever conceived by JPM which is advising Europe on coming up with structured finance products that are so complex nobody will ask any questions and will automatically assume someone else has done the homework, it is also the quintessential ponzi instrument. The Telegraph reports that the already reduced 3 EUR billion "target was only met after the EFSF resorted to buying up several hundred million euros worth of the bonds." You read that right: in its first bond issuance since its transformation to the European Bank/Soveriegn Bailout Swiss Army Knife, the EFSF not only failed to raise a minimum token amount, but also had to... buy its own bonds. We can assume that the money the EFSF needed to fund said purchase came from the money growing tree, as at last check the ECB was still not funding the EFSF with crisp, new zEURq.PK equivalent binary 1s and 0s. But at least we all know what happens when the global ponzi goes full retard.

More on this surreal story which will be promptly buried in the barrage of Monday headlines because an international advisor to Goldman Sachs is now in charge of Italy.

Sources said the EFSF had spent more than €100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt.

The revelation will be seen as a major failure and a worrying sign of future buyers strike after EFSF officials and their bankers had spent recent weeks travelling the world attempting to persuade key investors, including China's national wealth fund and Japanese government funds, to buy its bonds.

And just in case one monetization vertical was not enough, Europe used, well, all the other ones it could:

Other European Union funds are also understood to have supported the EFSF's bond sale. The failure of the EFSF will increase pressure on the European Central Bank to effectively become the lender of last resort for the eurozone, a move it has strongly resisted.

At a private breakfast organised by PI Capital last week, Mark Hoban, the Treasury minister, said: "What it doesn't do is provide the next stage of the solution, which is how do you stop this from happening again?" he said.

The move, by the European Investment Bank, will cause more disquiet among non-eurozone EU members who have become concerned about their growing exposure to the cost of rescuing the currency bloc.

The explanation, for anyone whose brain just exploded, is that despite the marionette rotation at the top, the math of Europe is still not only absolutely hopeless, not to mention meaningless, but somehow just got even worse, because take away the magical powers of modern finance to be one with the ponzi, and Europe would have already imploded.

It also means that our earlier observation that the EFSF is an AA+ equivalent credit instrument has to be revised: pro formaing out the ponzi, means it is at best AA if not A, and most likely D if one takes away all the magic bells and Keynesian whistles, unicorns and other end of the western financial world loopholes that modern finance is forced to resort to every single day to mask the fact that every country in the developed world is now 100% bankrupt.

November 14, 2011 10:46 pm

Look behind you, Lucas and Mario

By Gideon Rachman

Ingram Pinn

The arrival of technocratic prime ministers in Greece and Italy has not been greeted with universal applause. Some complain that because Lucas Papademos and Mario Monti have not been elected, their appointments will simply confirm the elitist and undemocratic nature of the European project.

Perhaps so. But technocrats have something to be said for them in the middle of a financial crisis. They are perfectly at home in the world of yield curves and collateralised debt obligations. They understand foreign countries, as well as the markets. If you enter their offices they are unlikely to ask for a bribe or to pinch your bum. Since they are assumed not to want a long-term career in politics, they may be able to take difficult decisions.

European technocrats tend to have strikingly similar credentials. Compare the CVs of Mr Monti, Mr Papademos and Mario Draghi, the newly arrived head of the European Central Bank. All three men are economists who trained in the US. All three have had top jobs in the bureaucracy of the European Union. Both Mr Monti and Mr Draghi have worked for Goldman Sachs.

These qualifications will please the markets and upset anti-globalists. But Europe, and the world at large, has every reason to hope that Messrs Monti and Papademos can work miracles. For if the technocrats fail to do so, the extremists are waiting in the wings.

In Greece, about a quarter of the electorate now say that they favour parties of the far left, and a further 8 per cent back the nationalist right. Collectively, the political extremes in Greece now muster more support than either of the two mainstream parties. The shape of Italian politics, after the forced resignation of Silvio Berlusconi, is likely to be confused for a while. But Italy has spawned powerful communist and far right movements in the past. In the meantime, Umberto Bossi of the Northern League says that he will relish entering opposition where he can rail against the EU, immigrants and southern Italians.

The radicalisation of politics is just as visible in the creditor nations of Europe as amongst the debtors. Marine Le Pen of the far right National Front will have a big impact on the 2012 presidential election in France, although she is unlikely to win. In the Netherlands the government is now reliant on the votes of the Freedom party led by Geert Wilders, which is running second in the polls. Austria’s far right Freedom party is at level pegging in the polls with the governing People’s party. In Finland the nationalist True Finns are still gaining ground and are easily over 20 per cent in the polls.

All of these rising parties rail against “elites”, whether in Brussels, Wall Street or their own governments. They are all hostile to globalisation and to immigration, particularly from the Muslim world. Some parts of the European far right, such as the Jobbik party in Hungary, still play on traditional anti-Semitic themes. But others, like Mr Wilders in the Netherlands, are strongly pro-Israel, perhaps because they see the Jewish state as an ally in a clash of civilisations with the Muslim world.
Increasingly, however, Europe’s populists are intent on breaking out of the electoral ghetto of hostility to immigration – and are instead stressing economic and eurosceptic themes that have a broader appeal.

All the populist parties are deeply sceptical of the EU, which they see as promoting most of the things they abhor: multiculturalism, international capitalism, the erosion of national borders and the erasure of national currencies.

Ms Le Pen campaigns to withdraw France from the euro, impose tariff barriers and roll back the Schengen agreement on free movement of people across the EU. Mr Wilders, who was once a single-issue anti-Islam politician, has just announced he is investigating the possibility of the Netherlands ditching the euro and going back to the guilder. Polls show that a majority of the Dutch population now regret joining the European single currency.

For the moment, across Europe, there is no party of the far right or the far left that looks close to winning power through the ballot box. Generally the mainstream parties can still band together to keep the extremes out. But it would still be a big mistake to write the populists and extremists off.

These groups are already powerful enough to strongly influence the debate. Mainstream politicians in creditor nations such as Finland, the Netherlands and Slovakia say that, after the Greek bail-out, they could not possibly vote for a further package of loans for Italy – the voters would revolt and turn to the political extremes. In France, debates on immigration and on economic policy have clearly been pulled right by the National Front.

All this is happening in an economic situation that is bad – but not yet catastrophic. Imagine, however, what the European political landscape would look like if banks started to collapse, people lost their savings and their jobs, and there was another deep recession. At that point voters would be desperate and disillusioned enough to turn to the extremist parties in much larger numbers.

So a great deal is riding on the ability of the technocrats to stabilise their national economies, calm the bond markets and prevent another financial crisis and a disorderly break-up of the euro.

The trouble is that, while Messrs Monti, Papademos and Draghi are very able men, they are not miracle-workers. The danger is that the situation in Europe may now be too far gone for even the most steely and brilliant of technocrats to turn things around.
Copyright The Financial Times Limited 2011.

Inside Business

November 14, 2011 8:47 pm

Eastern Europe has most to fear from banks’ retreat

Faced with an anaemic growth outlook in developed markets and an intensifying regulatory clampdown on banks, you would think lenders would be stepping up their focus on emerging markets.

Quite the reverse, it seems. Take China for starters. Last week, Goldman Sachs, hardly the weakest of global financial institutions, announced it wanted to offload another $1.5bn worth of shares in Industrial & Commercial Bank of China.

Only a few months earlier, Bank of America Merrill Lynch had followed a similar strategy, halving its stake in China Construction Bank.

In the short term, there is a clear dual appeal of cauterising the problem of slumping Chinese bank valuations (Goldman took a $1bn hit in the third quarter of the year, having to mark down the value of its ICBC stake), while also releasing some much needed capital to buoy balance sheets.

Having such large sums tied up in shareholdings is set to be unattractive under new capital regulations. Worse still, the stakes had not brought in the business that some had expected they would. Buttering up the Chinese state, still the controlling shareholder at all local lenders, didn’t work. Following the same logic, bankers reckon the sell-down of stakes won’t damage the underpinning relationships between the US banks and their Chinese partners.

That is debatable, but what is certain is that backing away from the world’s biggest market looks odd when the prospects for business in so much of the rest of the world are bleak.

A similar trend – though less marked – is taking place in that other emerging markets powerhouse, Brazil. Here, surely, there should be no nervousness about the state’s limiting hold on the market.

All the same, HSBC is trying to sell its consumer lending business in Brazil, as part of a global pullback from much of its retail banking network, and Royal Bank of Scotland is in retreat in investment banking. Only JPMorgan is really pushing ahead with a growth strategy in Brazil, according to local rivals.

Yet, this is one of the few countries in the world where banks are still generating typical return on equity numbers of 25 per cent or more, reminiscent of pre-crisis levels on Wall Street.

Again, bankers say there is pressure from head office, and from home market regulators, for capital to be retained at the centre of a group’s operations. Nowhere is that more true than in Europe, where the continent’s banks not only have to bring themselves into line with global Basel III rules on capital adequacy over the next few years, but by June 2012 must comply with tougher targets set by the European Banking Authority, the pan-EU regulator.

If that constrains far-flung operations, it will hit hardest closer to home. As UniCredit revealed on Monday, alongside a €7.5bn rights issue, it plans to narrow its geographic focus in eastern Europe, where it is currently the number one lender. A few days earlier, Germany’s Commerzbank similarly pledged to restrict new lending to only Germany and Poland, cutting adrift the rest of its eastern European operations.

Ever since the world became excited about the Bric economies of Brazil, Russia, India and China, the promise of eastern Europe has drawn less attention. But with western banks, predominantly western European banks, controlling nearly three-quarters of eastern Europe’s banking system, this is the region that has the most to fear from a retreat of developed market banks from the emerging markets.

While Poland and the Czech Republic remain relatively attractive, virtually every other market is vulnerable to a credit crunch, as western banks freeze new lending. More disruption could be caused as they try to sell old portfolios of business or whole entities.

The squeeze is made all the tighter by the fact that the banks with the biggest presence in eastern Europe are among those with the biggest troubles back home. Aside from UniCredit and Commerzbank, the list includes Austria’s Erste and Raiffeisen, both of which are seen by analysts as undercapitalised, France’s Société Générale, which has embarked on aggressive shrinkage, not to mention the Greek banks that will have no choice but to retrench from their leading positions in parts of south-east Europe.

All of this clearly matters for the affected economies – if the traditional suppliers of credit suddenly withdraw capacity en masse, as threatens to be the case in much of eastern Europe, economic disruption looks pretty much inevitable.

But it also matters profoundly for banks and their shareholders. If western banks withdraw systematically from growth markets, either to hoard capital or to de-risk, there is yet another reason – on top of the regulatory and economic constraints – for investors to desert them.
Patrick Jenkins is the Financial Times’ Banking Editor
 Copyright The Financial Times Limited 2011.

Don’t split Europe; make it stronger

David Miliband

I don’t know whether to weep or laugh. Eurozone leaders have turned a €50bn Greek solvency problem into a €1,000bn existential crisis for the European Union. Barack Obama cannot remember “whether it was Merkel, Sarkozy or Barroso” – no first names or titles – who told him, as grand hopes for the Cannes summit turned to dust, “welcome to European politics”. And David Cameron calls on the European Commission – the embodiment of “Brusselsbureaucracy and elitism that his government loves to hate – to prevent the 17 countries of the eurozone running the EU show in their own interests.

The only people satisfied are eurosceptics and federalists. Both say ‘I told you so. Both make valid points about weaknesses of Europe’s hybrid structurepart intergovernmental and part supranational. Both feed off each other to tell their own supporters that now is the moment to break with the compromises of the past.

Every political system is a balance of efficiency and legitimacy. The sceptics sacrifice efficiency for legitimacy. Their arguments about sovereignty ignore the reality of an interdependent world – in which regional co-ordination and collaboration is going to become increasingly important. The federalists substitute efficiency for legitimacy. They ignore the reality that national particularities, far from disappearing, are on the rise.

The Lisbon treaty tried to square the circle. The post of president of the European Council, a former head of government to chair the meetings of heads of government, was created expressly to “drive forward its work on a continuous and consistent basis” and “make the EU’s actions more visible and consistent”. In other words, bang heads together and reach out to the people.

But the truth is that European politics and politicians have been unable to cope with the triple blow of slow (and slowing) economic growth, rising sovereign debts and unstable financial institutions. Chancellor Angela Merkel and her senior colleagues have prime responsibility, but ‘Presidentvan Rompuy has been invisible.

The danger of the current situation is that both sceptics and federalists get their way as the EU splits between core and periphery. The eurozone does need a stronger centre. That will enlarge the gap between ins and outs, ‘vanguard’ and ‘rearguard’. And the eurozone countries will seek to get their way in the wider EU, or go it alone.

For Britain, it is a fateful development. Governments have sought to prevent a two-speed Europe for 40 years. Edward Heath celebrated our entry into “the framework of a single community”. Margaret Thatcher embraced the deepest of single markets. John Major played with ‘variable geometry’. Tony Blair put it into practice by supporting stronger European foreign, energy and environmental policy from outside the euro.

In every case the UK feared a two-speed Europe would leave us in the second division. And we have made the argument that the rest of the EU would be much worse off without us. British politicians need to make the case that Europe is better off with Britain on the inside as passionately as we argue that Britain needs a strong Europe.

The government’s decision to make the repatriation of powers from Brussels its top priority for European negotiations is deluded and dangerous. Deluded because the last thing other countries, including the otherouts’ from the eurozone, want is to ally themselves with a quixotic British campaign. Dangerous because the failure to negotiate these repatriations will only intensify the fury of the sceptics.

Second, every country needs an alliance with Germany. That is especially the case for a UK determined to avoid a slide to the European exit door. German fears of a transfer union provide the opening. We should be supporting the Berlin-inspired treaty change that enforces shared responsibility for the eurozone’s economic future across its members. The quid pro quo would be buffers against a two-speed Europesafeguarding the rights of non-euro members and preserving enhanced co-operation in areas beyond macroeconomic policy.

Third, Britain needs to play to its comparative advantages in defence and foreign policy, and its interests in energy, to help move the EU forward. This is not about beinggood Europeans”. It is about national interest in an outward-looking Europe.

Fourth, although Europe is now a danger to the rest of the world’s economic prospects, the rest of the world is not standing still. In the next two years, the EU negotiates a new budget for the seven years until 2020. The shock of the eurozone crisis needs to be a spur to budgetary reform (and not just budget limits). In universities, infrastructure and innovation Europe (beyond Germany) needs to chart a new growth path.

Fifth, we should be making the Lisbon treaty work. In spite of opposition to its passage, the government said they would make its innovations work. President van Rompuy is up for re-election in June. He needs to up his game in a big wayabove all its vision and projection.

Sixth, Britain must build coalitions across the in/out divide. It is no good confining ourselves to dinner with the outs. We need a positive vision for an open, prosperous Europe to sell across the 27 countries.

These are issues for politicians of all parties. But they are a matter for business too. It is no good complaining about the short term posturing of politicians if business and trade unions don’t speak up. Reform will be arduous. But the alternative, opting out by design or mistake, would be disastrous.

The writer is the MP for South Shields, and former British foreign secretary.