Dawn of a new superpower

When the world continues to discuss China’s impact even when there are other issues to consider, China has clearly ‘arrived’

CHINA’S unrelenting growth is continuing to fuel speculation about the implications of its spectacular rise for the rest of the world.

Its irrepressive re-emergence as a major world power shapes and colours private discourses, academic analyses and bilateral and multilateral discussions, whether or not intended originally to discuss China.

It permeates strategic discourses behind closed doors, casual coffeeshop talk and everything in between. The recent Germany-Malaysia Security Forum in Kuala Lumpur, sponsored by Konrad Adenaur Stiftung (KAS) and organised by ISIS Malaysia, was an example.

Germany’s political foundations like the KAS are affiliated with their respective political parties, and with the KAS it is with Chancellor Angela Merkel’s rightwing Christian Democratic Union (CDU).

It is significant that even with a conservative CDU government, Germany has no qualms about the rise of China. German delegates instead looked constructively ahead to an even more prosperous China with which to work, above and beyond any ideological differences.

A Malaysian delegate privately remarked that Germans had been trading successfully with China for centuries. China had been a major world power then and, after a period of isolation and internal upheaval, it is becoming a major world power again.

Countries East and West that have had similarly positive experiences with China feel the same. Those that might have upset China through war, invasion, occupation or squabbling over tiny islets might feel differently, but exactly how an unprovoked China would perceive them today is another matter.

A larger conference in Berlin some years ago attended by delegates from various countries, and sponsored by Germany’s Defence Ministry, was similarly positive about China. At that time, Merkel’s government comprised her CDU, the equally rightwing Christian Social Union (of Bavaria) and the left-of-centre Social Democratic Party (SPD) of her immediate predecessor, Gerhard Schröder.

Since then, Merkel’s CDU-led coalition had substituted the SPD with the Free Democratic Party (FDP), a centrist party that became another right-of-centre party. That Germany’s formal posture towards a rising China has not changed indicates that its positive outlook on China is deep-seated and enduring, unaffected by political ideologies in Germany or China.

Nonetheless, some classic questions about a rising China and its impact on Asia and the world linger. These tend to refer to developments such as the increasing defence expenditure of countries in East Asia.

Other slick assumptions are that Asean countries are “hedging” against China, and the world has moved from the Westphalian concept of national sovereignty to that of “responsibility to protect”. The former is untested and the latter is still disturbing.

It is easy to make a superficial connection between these issues and a rising China, and then to conclude that there is an arms race in the region, and the arms race must therefore have resulted from a region alarmed by China’s rise.

These points had been raised erroneously 20 years ago, and they will still be raised 20 or more years from now. The problem with these simple-minded assumptions is that they neglect both the key details and the big picture.

All countries spend continually on defence, routinely preparing for contingencies from any quarter and not just to arm against any particular threat. This happens everywhere all the time, regardless of the prevailing strategic situation in a country or region.

A Malaysian delegate explained that it was part of the normal course of running defence establishments, when countries need to renew their ageing arsenals or when they become more developed and can afford to spend more. It might be added that defence procurement is the most lucrative industry in the world, so it easily acquires a logic and a momentum of its own.

However, at a time when Philippine and Chinese officials have had uncomfortable brushes with each other over the disputed Scarborough shoal in the South China Sea, blips in national defence budgets may appear suggestive.

But alarmist presumptions about regional threats and the need to “arm” against them can easily acquire a logic and a momentum of their own as well, however unjustified. At the same time, some parties may be hoping to see conflict in the region to profit from it through the arms trade, strategic leverage or recruitment of allies.

Such a prospect militates against this region’s collective interests and several of its abiding realities.

First, the political stability and economic prosperity of countries in East Asia depend on the stability and propensity for growth in the region as a whole. Injury to the region’s prospects also hurts individual national prospects.

Second, the countries in East Asia, particularly those of Asean, are clearly dwarfed by China. No amount of individual “arming” can address the gulf in national defence capacities between them and China.

Third, Asean countries are still unable to act as one militarily even if by doing so their collective clout can achieve some “balance” with a hulking China. Age-old border issues, disputed maritime territory and other niggling bilateral concerns have prevented any sense of an Asean security entity from developing until now and for the foreseeable future.

Fourth, the immature presumption that smaller countries in East Asia can always bank on the US for protection is both mistaken and dangerous, because that notion becomes very destabilising whenever it is proven untrue.

The notion of a US acting as a countervailing force against China derives only from those instances when US and indigenous concerns coincide in ways that are dissimilar to China’s. When US and East Asian interests diverge, as they will at certain points, the regional strategic picture will change.

US-China joint interests have grown tremen­dously and will continue to grow. They may already have surpassed the shared interests between the US and East Asia minus China.

The US itself is the sole superpower with an agenda and priorities of its own. Beyond a limited convergence of interests with other countries, it will not deign to act as a servant or bodyguard of smaller nations.

China remains inundated with domestic problems of its own. These span pressing social, administrative and environmental concerns as well as restive provinces and an economy running out of steam.

Meanwhile, it has witnessed the collapse of the Soviet Union that had suffered excessive arms expenditures, and a troubled US economy weighed down by overspending on foreign wars. Pragmatic Chinese leaders today would know better than to repeat those mistakes.

Modern China’s success also depends considerably on a peaceful East Asia that has enabled it to boost its exports worldwide. And since the regional peace has also been maintained by a US military presence in the Asia-Pacific, China as its greatest economic beneficiary might perhaps be asked to help pay for that presence.

When I mentioned that to Martin Jacques, the British academic and author of When China Rules The World, he chuckled. But that is a modern-day reality that a country like Germany may be able to understand.

Clearly, not all Western views of a rising China are created equal. The differences between the German and US views are interesting, and they become more telling when Germany is a leading country and the strongest economy in Europe.

Perhaps that has something to do with Germany not having to “guard” its status as the sole superpower in the world.

Behind The Headlines By Bunn Nagara

The euro crisis just got a whole lot worse

Jeremy WarnerWith Europe plunging back into recession and unemployment soaring, Francois Hollande, the French president elect, is calling for growth objectives to be reprioritised over the chemotherapy of austerity.

Riot policemen lead away a right-wing protestor holding a placard reading

Riot policemen lead away a protester holding a placard reading ‘Let’s get out of the Euro’ during May Day demonstrations in Neumuenster, Germany Photo: Reuters

Angela Merkel, the German Chancellor, has meanwhile continued to insist that on the contrary, Europe must persist with the hairshirt. What’s needed is political courage and creativity, not more billions thrown away in fiscal stimulus. Stick with the programme, she urges, as the anti-austerity backlash reaches the point of outright political insurrection.

Hollande and Merkel are, of course, both wrong. What Europe really needs is a return to free-floating sovereign currencies. Only then will Europe’s seemingly interminable debt crisis be lastingly resolved. All the rest is just so much prancing around the goalposts, or an attempt to make the fundamentally unworkable somehow work.

The latest eurozone data are truly shocking, much worse in its implications both for us and them than news last week of a double-dip recession in the UK.

Even in Germany, unemployment is now rising, with a lot more to come judging by the sharp deterioration in manufacturing confidence. For Spanish youth, unemployment has become a way of life, with more young people now out of a job (51.1pc) than in one. In contrast to the US, where the unemployment rate is falling, joblessness in the eurozone as a whole has now reached nearly 11pc. Against these eye-popping numbers, Britain might almost reasonably take pride in its still intolerable 8.3pc unemployment rate.

There is only one boom business in Spain these days – teaching English and German. No prizes for guessing where these students are heading.

Hollande’s opportunism in calling for a growth strategy he must know cannot be delivered looks like being answered only by intensifying recession. Maybe Mario Draghi, president of the European Central Bank, will surprise us after Thursday’s meeting with a rate cut and a eurozone-wide programme of quantitative easing. But even if he did, it wouldn’t fix the underlying problem, which is one of lost competitiveness manifested in ever more intractable levels of external indebtedness.

To think these problems can be solved either by fiscal austerity or, as advocated by Hollande and others, by its polar opposite of fiscal expansionism is to descend into fantasy.

By reinforcing the cycle, and thereby exacerbating the slump, fiscal austerity is proving self-defeating. Far from easing the problem of excessive indebtedness, it is only making it worse.

But it is equally absurd to believe that countries in the midst of a fiscal crisis can borrow their way back to growth. Who is going to lend with the certainty of a haircut or eurozone break-up to come?

I’ve been looking at the comparative numbers on fiscal consolidation, and they reveal some striking differences. The hairshirt prescribed for others is most assuredly not being donned by austerity’s cheerleader in chief, Germany.

In fact, German government consumption is continuing to rise quite strongly, even in real terms, and the fiscal squeeze pencilled in by Berlin for itself for the next three years is marginal compared with virtually everyone else. Germany is requiring others to adopt policies it has no intention of following itself. What’s so odd about that, you might ask?

Right to spend

Germany has earned the right to spend through years of prior restraint. It’s got no structural deficit to speak of and, in any case, isn’t that the way things are meant to work, with those capable of some fiscal expansionism compensating for the squeeze imposed by others?

All these things are true, but there is something faintly hypocritical about a country prescribing policy for others that it wouldn’t dream of imposing on itself. Germany’s supposed love of self-flagellation is actually something of a myth.

By the way, despite the rhetoric, Britain is hardly an outrider on austerity either. Now admittedly, the Coalition’s plans for fiscal consolidation have been somewhat derailed by economic stagnation. We were meant to be further along than we are. But in terms of what’s left to do, the UK is no more than middle of the pack.

On current plans, by contrast, the fiscal squeeze in the US, land of supposed fiscal expansionism, ratchets up substantially to something quite a bit bigger than what the UK has pencilled in for the next two years. It remains to be seen what effect that’s going to have on the American recovery. Will renewed growth melt away as surely as it did in early 2011, or is it self-sustaining this time?

Back in the eurozone, the stand-off between creditor and debtor nations shows few, if any, signs of meaningful resolution. During the recession of the early 1990s, there was a famous British Property Federation dinner at which the chairman introduced the then chief executive of Barclays Bank, Andrew Buxton, as “a man to whom we owe, er, more than we can ever repay”. It was a good joke, but it also neatly encapsulated what happens in all debt crises.

When the debtor borrows more than he can afford, the creditor will in the end always take a hit. The only thing left to talk about is how the burden is to be shared. The idea that you can force the debtor to repay by depriving him of his means of income is a logical absurdity, yet this is effectively what’s going on in the eurozone.

When such imbalances develop between countries, they are normally settled by devaluation, which provides a natural market mechanism both for restoring competitiveness in the debtor nation and establishing the correct level of burden sharing.

Least tortuous form of default

It’s default in all but name, but it is the least tortuous form of it.  Free-floating sovereign exchange rates also provide a natural check on the build-up of such imbalances in the first place.

The reason things got so out of hand in the eurozone is that investors assumed in lending to the periphery that they were effectively underwritten by the core, mistakenly as it turned out. Interest rates therefore converged on those of the most creditworthy, Germany, allowing an unrestrained credit boom to develop in the deficit nations.

None of this is going to be solved by austerity. For now, there is no majority in any eurozone country for leaving the single currency, but one thing is certain: nation states won’t allow themselves to be locked into permanent recession. Eventually, national solutions will be sought.

The whole thing is held together only by the fear that leaving will induce something even worse than the current austerity. This is not a formula for lasting monetary union.

Eurozone unemployment hits record 10.9% as manufacturing slumps to recession!

Eurozone unemployment hit a record in March, with Spain’s 24.1% rate setting the pace.

NEW YORK (CNNMoney) — Unemployment in the eurozone rose to 10.9% in March, another sign of the broad economic weakness and possible recession across the continent.

The unemployment rate across the broader 27-nation European Union remained at 10.2% in March, according to a organization report Wednesday.

But the 17-nation eurozone unemployment edged up from 10.8% in February. The EU and eurozone rates are the highest since the creation of the common euro currency in 1999.

There are now 13 nations in Europe struggling with double-digit percentage unemployment, led by a 24.1% rate in Spain, which was a record high, and 21.7% in Greece.

The rising jobless rates are primarily blamed on the ongoing European sovereign debt crisis, which has forced governments to take tough austerity measures to cut spending.

There are 12 countries in Europe that have had two or more consecutive quarters in which their gross domestic product has dropped — a condition many economists say define a recession. Nine of the countries are in the eurozone, and three use their own currency.

The United Kingdom, which had an 8.2% unemployment rate in its most recent reading, is the largest economy now in recession.

The entire EU and and eurozone are widely believed to be in recession as well, a fact likely to be confirmed when their combined GDPs are reported on May 15.

Even some of the healthier countries in Europe are likely to meet that criteria, including Germany, the EU’s largest economy and one in which unemployment is 5.6%, the fourth-lowest rate on the continent.

German GDP declined 0.2% in the fourth quarter and many economists are forecasting another drop in the first quarter, suggesting Germany could be in recession soon.


By contrast to Europe, the U.S. unemployment rate has been steadily falling, reaching 8.2% in March. The jobless rate here reached a 26-year high of 10.0% in October 2009, but it has declined in six of the last seven months, shaving almost a full percentage point off the 9.1% rate of last August.

Economists surveyed by CNNMoney forecast that the rate will stay unchanged in the April jobs report this Friday, while hiring is expected to pick up to a gain of 160,000 jobs

By Chris Isidore @CNNMoney ,  Newscribe : get free news in real time

Eurozone manufacturing heads towards recession


(BRUSSELS) – Gloom over eurozone manufacturing deepened in April, highlighting the impact of policies to control budgets and signalling recessionary pressures, a Markit survey showed on Wednesday.

A key index of activity based on a survey by Markit fell to almost the lowest level for three years.

Markit publishes closely watched leading indicators of economic activity and in its latest survey for its purchasing managers’ index the firm said: “The eurozone manufacturing downturn took a further turn for the worse in April.”

The adjusted manufacturing PMI figure, closely watched as an indicator of economic trends, fell to 45.9 from 47.7 in March.

A figure of below 50 points to contraction and Markit noted that “the headline PMI has signalled contraction in each of the past nine months.”

The chief economist at Markit, Chris Williamson, said: “Manufacturing in the eurozone took a further lurch into a new recession in April, with the PMI suggesting that output fell at (a) worryingly steep quarterly rate of over 2.0 percent.”

He said that “austerity in deficit-fighting countries is having an increasing impact on demand across the region” and that “even German manufacturing output showed a renewed decline.”

Williamson commented that the latest forecast from the European Central Bank “of merely a slight contraction of GDP (gross domestic product) this year is therefore already looking optimistic.”

He added: “However, with the survey also showing inflationary pressures to have waned, the door may be opening for further stimulus.”

His remarks highlight controversy over policies in many countries to correct budget deficits and heavy debt to install confidence on debt markets where governments borrow.

There are increasing warnings that the eurozone must raise economic growth, but opinions differ on the best route, with some saying that budget austerity opens the way to structural reform and competitiveness and others saying that extra stimulus is essential.

Markit said that “the April PMIs also indicated that manufacturing weakness was no longer confined to the region’s geographic periphery.”

In Germany, which has the biggest economy in the eurozone and has shown broad resilience to downturn elsewhere, Markit also noted a setback.

“The German PMI fell to a 33-month low, conditions deteriorated sharply again in France and the Netherlands also contracted at a faster rate,” it said.

Markit said: “There was no respite for the non-core nations either, with steep and accelerating downturns seen in Italy, Spain and Greece. Only the PMIs for Austria and Ireland held above the 50.0 no-change mark.”

Markit said that manufacturers reported weak demand from clients inside and outside the zone and this had hit even German companies.

The worsening outlook for eurozone manufacturing was also affecting the job market, Markit said, just as eurozone data put the unemployment rate at a record high level.

In manufacturing “job losses were reported for the third straight month in April, with the rate of decline the sharpest in over two years,” Markit said on the basis of its survey. – AFP.

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Europe: ‘Dark clouds on the horizon’


Michael Klein, is the William L. Clayton Professor of International Economic Affairs at the Fletcher School, Tufts University, and a nonresident Senior Fellow in Economic Studies at the Brookings Institution.

This weekend’s meetings of the International Monetary Fund and the World Bank are overshadowed by “dark clouds on the horizon” that threaten the “light recovery blowing in a spring wind,” according to Christine Lagarde, the managing director of the IMF.

The main source of the dark clouds is Europe, where recovery remains weak.

More than three years into the crisis, policy options in Europe are limited; fiscal stimulus is out of reach for many countries, and recent efforts by the European Central Bank provided only a temporary respite. In this environment, strong and sustained recovery depends upon rebalancing within Europe, whereby countries’ trade imbalances are reduced.

But rebalancing is a two-sided affair. We have all heard the ongoing calls for some European countries to rebalance deficits through painful austerity measures.

These calls need to be balanced with demands that countries with surpluses also move to rebalance.

In particular, Germany must take advantage of its scope for fiscal expansion to bolster European recovery and to forestall its own slippage towards an economic slowdown.

There are those who argue that the German surplus reflects its productivity growth and labor market reform. These people argue that Germany could only rebalance by stifling its own economic dynamism.

There are three responses to this argument:

Shared rewards: Reforms have made labor markets more flexible in Germany. Innovative policies, such as the Kurzbeit, the short-time working policy, limited the unemployment effects of the crisis.

German unemployment briefly peaked at 8% in July 2009 while the U.S. unempoloyment rate spiked to 10% in October of that year. Despite the soft landing, workers have not fully shared in the benefits of the recovery, and trade unions have been demanding higher wages.

Higher wages for workers would raise their demand for consumer goods, including the products from other euro-area nations.

Shared consequences: German exporters, and German producers of import-competing goods, have benefited from the weak euro.

Since 2008, the German real exchange rate has depreciated by almost 9%, even while its economy recovered relatively strongly from the crisis and its economy was strongly in surplus.

In contrast, over this same period the Swiss franc appreciated 16% — estimates suggest that had the German real exchange rate tracked the Swiss real exchange rates, German export growth would have been cut in half.

Another major surplus country, China, saw an appreciation of its real exchange rate by more than 10% over this period.

If Germany had a free-floating currency of its own, rather than one whose value is determined by the fate of the full set of euro members, it would have seen an appreciation that would have brought down its current surplus.

Shared experiences: Another surplus country offers a striking recent example of rebalancing: China. In 2007, China’s surplus exceeded 10% of its GDP.

The IMF projects that the debt to GDP ratio will fall to 2.3% in 2012, well below the 6.3% forecast published in its World Economic Outlook last year. In contrast, the most recent IMF forecast of the 2012 German debt to GDP ratio, of 5.2%, exceeds last year’s forecast of 4.6%.

As a member of the euro area, Germany will not see the natural forces of a currency revaluation bring about a reduction in its current surplus.

But the government has the tools available to rebalance, and foster growth both domestically and more widely in Europe, through a stimulative fiscal expansion.

There are other tools available as well, such as policies to promote female labor force participation (which is low relative to other industrial countries) and liberalizing retailing (which could help promote domestic demand), to raise growth and to widen its benefits among its citizens.

Rebalancing needs to occur for both deficit and surplus countries to support and sustain growth during these challenging times. To top of page

By Michael W. Klein @CNNMoneyMarkets April 21, 2012: 10:50 AM ET

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Glooming Davos World Economic Forum 2012!

Davos parties amid the gloom


The notable absence of a big Chinese delegation at the Davos World Economic Forum due to the Chinese New Year season gave the South-East Asian nations the opportunity to shine.

I’M hardly your quintessential Davos Man but I do enjoy my trips to the World Economic Forum (WEF), where I chair the Global Agenda Council on South-east Asia.

It’s not only the chance to hobnob with the global elite, but also get a sense of where the world is heading.

Davos this year was a blur, though. Perhaps it was because my schedule was packed, or maybe it was because I was recovering from the flu.

Whatever the cause, my week in Switzerland was a whirr of images and sensations.

The sense of gloom among the world’s players seemed to have become de rigueur after years of slow growth.

Nevertheless, it didn’t put a stop to the countless expensive networking parties at WEF.

I guess austerity doesn’t apply to the rich and powerful.

Also notable was the absence of a big Chinese delegation because of the Chinese New Year season.

This gave the chance for other East Asian nations to shine.

Thai Premier Yingluck Shinawatra led a large, well-received delegation.

After the twin distractions of political conflict and natural disaster, Thailand appears eager to promote the idea of its economic recovery.

Shinawatra’s good looks more than compensated for the hesitancy in her delivery.

Indonesia, too, had a large contingent despite the absence of President Susilo Bambang Yudhoyono, a welcome sign that Indonesia’s corporate leaders are ready to engage the rest of the world alone.

I also spent time with a small Burmese entourage.

They were basking in the country’s apparent rehabilitation, and we made plans to meet again in the future.

We Malaysians also hosted our own breakfast.

It was attended by some 20 powerful international corporate and political leaders.

The Malaysian star of the Aung San Suu Kyi biopic The Lady, Michelle Yeoh also made an appearance to add both glamour and intelligence to the event – but I’m a fan and therefore biased.

Still, it was good to see that there was interest in Malaysia, particularly as a services hub.

I also noted that the delegations from African nations were large although they pulled little weight compared to India or Brazil.

The events featuring British Prime Minister David Cameron and US Treasury Secretary Timothy Geithner caused little stir.

Conversely, Brazilian Foreign Minister Antonio Patriota had a swagger about him as EU technocrats lobbied the BRICs for help to save Europe.

Still, there was an uneasy sense in the air that Europe’s fall is facilitating Germany’s rise.

You could see German products everywhere, including the shiny Audis shuttling the VIPs between Davos and Klosters and VW vans for everyone else.

I even picked up a special edition Stern magazine celebrating the 300th anniversary of the birth of King Frederick the Great of Prussia, which hailed him as an “uber-Prussian”.

Indeed, there seems to be a growing nostalgia in Germany for Frederick, who solidified Prussia’s power but was also renowned for his intellectual and cultural achievements, including founding Potsdam and patronising Voltaire.

Perhaps he reminds Germans of a time when they too were on the brink of great power, albeit untarnished by fascism.

Is it more than a coincidence that chancellor Angela Merkel has described herself as “very Prussian” and has not shied away from promoting “German values”?

Whatever the case, Berlin with its Prussian milieu will almost certainly take its place as Europe’s premier capital – which means that this tukang cerita (story teller) will have to brave the Brandenburg winter at some stage to get a sense of the city as well as German aspirations.

There were also encounters, whether planned or chance.

At Davos’ Indonesia Night, I wolfed down nasi goreng with Mukhlis of Antara and Uni Lubis of ANTV, discussing the possibility of the republic developing its own “soft power”.

At a quiet bar later on, I gossiped with my Financial Times columnist friend Gideon Rachman about the prospect of a Eurozone collapse.

I even remember trying to locate the Occupy WEF igloos. I spent a good hour trudging through the snow (which was metres high, by the way), before giving up because of the cold and damp.

One afternoon I slipped away from the conference and took the small funicular train to the Schaltzalp Hotel high above Davos.

There – amid the echoing halls of a fin de siecle “grand” hotel – I imagined the world of Nobel Laureate Thomas Mann as well as the immense, enveloping silence of the Alpine scenery, swathed in snow as I stood on the hotel’s terrace.

Finally, there was a moment when I was collecting my overcoat at the Morosani Schweizershof hotel’s cloakroom.

I paused because I remembered that it was here, last year that I saw Saif al-Islam Gaddafi, the son of the late Libyan dictator Muammar Gaddafi.

Back then, Gaddafi was the gadfly of the Arab and African worlds, while Saif was his modernising son and the toast of policy wonks everywhere.

Today the father is buried somewhere in the Libyan desert and Saif is in a prison in Zintan.

It’s a sign of how times change, but also how swiftly Davos moves on.

You can be everybody’s golden boy one minute and a pariah in the next. But that’s how the world turns.

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