Thursday, December 4, 2008

The Crisis and Trade

VoxEU has produced another e-book on the crisis, this time in relation to trade.

Sarko Emulates Palin

Sarko sounding a bit like Sarah Palin:

Obama and Europe

Alex Massie and Dan Drezner have been debating the question of whether tensions will rise between the US and Europe over Afghanistan after Obama takes over. Alex stresses the widespread popular sentiment in Europe that there is no military solution in Afghanistan. Dan counters that European policy elites are more receptive to the notion that a reinvigorated multilateral push in Afghanistan can halt the slide and possibly turn things around--provided that things in Iraq remain stable.

Of course the real joker in this deck is Pakistan. The Mumbai attacks underscore the volatility of the situation in Pakistan, and as US and European attention shifts from Iraq to Afghanistan, radical Pakistani groups are likely to seize the opportunity. Afghanistan will look more like pre-surge Iraq, and no "Sunni Awakening" pacification strategy presents itself, particularly if the Pakistani ISI is involved in the unrest and serving its own domestic political ends.

Will European public opinion remain negative if the Afghan theater heats up? Will this continue to be seen as a US operation, an extension of the Bush doctrine? A lot depends on Obama, but a lot depends as well on European leadership. For Sarkozy, I think the best strategy would be to refocus debate. Instead of viewing Afghanistan as the first stop in the "war on terror," a hopelessly discredited concept in the eyes of European publics, he could present it as an area of contention in a wider regional conflict involving two nuclear powers, India and Pakistan. It would be healthy if Obama took a similar tack. After all, the problem with radical Islam stems not from the existence of terrorist training camps in ungoverned wasteleands but from the spread of terrorist ideology, which is no doubt more rapid and effective in dense urban neighborhoods. The drive to control territory in Afghanistan is probably futile and certainly wasteful. Europeans, who know something about urban Islamic radicalism, might want to press that point with their new American counterparts. If that were done, European public opinion might not remain as static as Alex fears.

Minister of Stimulus

Eric Woerth has been promoted from secretary of state in charge of the budget to the new post of "stimulus minister." Next thing you know, he'll be sitting in a bathtub doing Cialis ads. Woerth's new position puts him in something like the same role as Larry Summers in the US. As head of the National Economic Council, Summers will presumably be coordinating the stimulus spending expected to begin soon after Obama takes office. Woerth will be doing the same in France. It will be interesting to see how closely firms receiving aid will be monitored in the two countries.

Stimulus Here, There, and Everywhere

Flash: the ECB reduced its principal rate by 0.75% to 2.5%, the biggest single decrease in its history.

Meanwhile, Sarkozy announced a 26 billion euro (1.3% of GDP) stimulus plan, focused on investment. Slightly less than half of this will come in the form of various types of aid to firms (reduced corporate taxes, VAT rebates, research credits). The rest will be public investment, most of it to go into projects already planned but frozen for lack of funding.

The devil, of course, will be in the details. Crony capitalism is alive and well in France, and there is a large pile of cash under this Christmas tree. It could easily be misdirected. This is where it would be useful if France had potent legislative oversight, a functioning opposition, a vigilant press, and all those other accoutrements of a vibrant democracy. But, as Keynes said, in a crisis, even paying people to dig holes and fill them up again can be useful, so we await further developments. The new package will send the deficit soaring to over 4% of GDP, but apparently the Stability and Growth pact is a dead letter, even if the official trigger for suspension has not yet been hit. There is debate about the effects on the euro: see here and here.

ADDENDUM: More details on stimulus package.

EDF Takes On Buffett

EDF is attempting to buy a nuclear power company in the United States, threatening to scuttle an offer made previously by Warren Buffett for the same firm. One can imagine the outcry if a US company did the reverse.