Economics & Trade

Europe's debt crisis may be biggest threat to Obama's re-election

Jorge Benitez — Fri, 09 Sep 2011 16:20:37 -0500

From Desmond Lachman, the Wall Street Journal: A European failure to contain its debt crisis would be a monumental electoral setback for Mr. Obama. This is not just because Mr. Obama's governing and economic philosophies are closely associated with the European economic model. Nor is it simply because Europe is a major U.S. export market. Rather, it is because a European failure is bound to have huge ramifications for U.S. and global financial markets.

If there is any doubt on this score, all one need do is consider the U.S. financial system's massive exposure to the European banks. In a recent survey, Fitch found that, as of the end of July, the U.S. money-market industry still had direct exposure to European banks of over a trillion dollars—or roughly 45% of money markets' overall assets. The Bank for International Settlement reports that American banks have loan exposure to German and French banks of more than $1.2 trillion.

This overexposure to the European banking system should be keeping Mr. Obama awake at night. Because those European banks in turn are all too exposed to the $2 trillion sovereign-debt market for Greece, Ireland, Portugal and Spain, and they have yet to recognize the large loan losses that they are bound to experience on their sovereign-debt holdings. . . .

A Continental debt crisis would not be good for the U.S. economy at the best of times. However, as the recent dismal U.S. jobs numbers underline, these are hardly the best of times for America. The prospect that an already stalling U.S. economy is now to be weaned off the monetary and fiscal steroids to which it has become accustomed over the past two years does not bode well, and an economic shock from Europe is the last thing that the U.S. economy or Mr. Obama now needs.

The 2012 elections will focus on one issue: The economy. Whether or not Mr. Obama has any control over the European factors that are putting the American economy at risk, voters may punish him for them anyway.

Mr. Lachman is a resident fellow at the American Enterprise Institute. (photo: Getty)

China's official newspaper warns West to respect U.N. role and Beijing's "legitimate interests" in Libya

Jorge Benitez — Thu, 01 Sep 2011 07:28:30 -0500

From Chris Buckley, Reuters: China's top official newspaper warned Western powers to let the United Nations lead post-war reconstruction in Libya, saying on Thursday that Beijing would seek to defend its economic stake after the ousting of Muammar Gaddafi.

The People's Daily, the main paper of China's ruling Communist Party, laid bare Beijing's qualms about the influence the United States, European powers and NATO may claim in post-war Libya. It appeared on the day leaders meet in Paris to discuss the future of the north African nation. . . .

"As a permanent member of the Security Council, China has full reason to stress the leading role of the United Nations," said a commentary in the Chinese-language People's Daily, referring to Libya, where rebels are trying to wipe out resistance from Gaddafi's supporters.

Iraq and Afghanistan, as well as Libya, showed what could go wrong if the U.N. is not the top body guiding international involvement in post-war rebuilding, said the newspaper.

"Looking back at these three local wars since the start of this century, it's easy to discern a pattern: the United Nations gets involved quite quickly and early on, but as developments evolve, the United States and its NATO allies come to the fore and steadily push out the U.N.," it said. . . .

"Stressing the leading role of the U.N. in Libyan affairs is to protect fairness in the country's reconstruction," it said, noting China's investments in Libya's telecommunications and construction sectors.

"China is willing to play an active role in Libya's reconstruction, and will give due attention to its legitimate interests in Libya," said the commentary.

The commentary appeared under a pen name "Zhong Sheng," a name suggesting the "voice of China," which is sometimes used to reflect higher level opinion. It reinforced recent comments from Chinese officials, who have joined Russia and Brazil in demanding the U.N. come to the fore in Libya.

A More Optimistic Davos

Richard Edelman — Mon, 07 Feb 2011 10:51:32 -0600

I have come down from the mountains for the twelfth time, with my head still aching not from excessive partying but from information overload at the World Economic Forum. Imagine being invited to an all you can eat buffet, with the most delectable foods laid before you, but with an unrealistic ten minute time limit imposed on your attendance at the party. I ran as hard as I could for four days, to sessions in the Congress Center, to cocktail parties and informational lunches. I also decided that this year, I would go into depth on fewer subjects, attending multiple sessions on a topic, rather than my usual grazing behavior. Here are my observations:

1) Economy on the Rise--The economic forecast is quite sunny, with BRIC nations expected to grow 7-8%, Germany and the USA around 3-3.5%, while the rest of the EU will struggle to grow 1% as government cutbacks take hold. Fareed Zakaria, Time Magazine made the case for optimism. “Every surprise has been to the upside.” Professor Halberstadt of Leiden University worries about the crisis of the unemployed in the West, noting 50% of the youth in Spain is not working. Major European figures, such as President Sarkozy of France and Prime Minister Merkel of Germany, pledged support for the Euro, whatever the cost, with Sarkozy contending that “it is not simply a money issue, it is a matter of peace.”

Mr. Schauble, minister of Finance of Germany said “there must be consequences if a member state cannot make budget in order to convince the markets that the Euro zone works.” Tim Geithner, U.S. Treasury Secretary, said that while the U.S. is in a relatively better place to address its fiscal issues, “We must recognize that we cannot grow our way out of the deficit. There will need to be spending cuts and tax hikes.”

2) Geopolitics—Two Areas of Focus--The uprising in Egypt began as we were at the Forum. While world leaders were careful to avoid anything more than bland statements, experts such as former Israeli Ambassador to the United Nations, Daniel Gillerman, said, “Egypt is following Tunisia in a move to democracy. This may well spread to Jordan and Syria.” Many speakers were concerned about the rise of Islamic fundamentalism in newly democratic states. A constant refrain was needed to find common ground between the two largest powers, China and the U.S. Larry Summers, professor at Harvard, said that the issues of currency, Taiwan, IP and protectionism are real, adding that the U.S. business community is now negative on Chinese policy.

Kevin Rudd, foreign affairs minister of Australia (who delivered his panel conclusion in fluent Mandarin) suggested that “the Chinese feel they have reformed their economy, joined the IMF, helped during the global financial crisis by massive stimulus, and now the US is afraid of us.” President Yudhoyono of Indonesia suggested that smaller nations band together in regional groupings to “resolve issues in our back yards, that become the building blocks for collective global governance.” This was his nice way of saying that the G-20 is deadlocked on issues from trade to environment.

3) Bankers Versus Government—Round Ten—The fisticuffs between financiers and the sovereign authorities continues. The banks came in loaded for bear, with Gary Cohn, president and COO of Goldman Sachs, contending that regulation had gone too far, and Bob Diamond of Barclay’s suggesting that the time for remorse had ended. I witnessed a classic face-off between Jamie Dimon, CEO and chairman of JP Morgan Chase, and President Sarkozy, the best WEF street theater. Dimon said, “Good policy is critical but the single objective now must be jobs and that means growth. Don’t do too much on financial regulation; the conversation is now too shrill between the banks and regulators.”

Sarkozy responded, “When the big U.S. banks went under in 2008, the cost of the failure was tens of millions of unemployed who had nothing to do with the crisis. There must be a limit to securitization. Is this a market economy or a madhouse?” By the end of the week, the bankers were much more conciliatory, but Christine Lagarde, finance minister of France, got in one more classic line. “You know what you can do? You can say thank you for the money for the bailout then begin to lend to small and medium sized businesses.”

4) Sustainability—Companies have moved from considering environment as social responsibility to recognizing the need to make dramatic changes, particularly in the supply chain. Paul Polman, CEO of Unilever (disclosure: client), said that his company is committed to doubling its revenue over the next decade but with zero growth in environmental impact. One important strategy is to move consumers from quantity to quality. He also suggested that companies must be involved in changing consumer behavior because “they are responsible for 70% of the consumption versus only 3% in our factories—how long they shower, how they cook and wash.” Product innovation can drive this behavior change; a new Unilever fabric softener means clothes need only one rinse, not two.

Professor Dan Goleman of Rutgers University said that a better educated consumer is now demanding a new level of corporate transparency, quoting Andy Rubin, VP for sustainability at Wal-Mart: “If you are going to be naked, you better get buff.” The CEO of Best Buy, Brian Dunn, (disclosure: client) said he is thrilled with his company’s decision to take back any electronics product when a consumer upgrades; his Geek Squad then refurbishes the machine and sells it at a very attractive profit. Ellen Kullman, Chairman and CEO of DuPont, noted the role of government and education as partners, pointing to a cooperative effort at the University of Tennessee to build a demonstration plant for production of ethanol from switch grass, which led to commercialization 18 months faster than if the company had proceeded on its own.

5) Shared Value—Indra Nooyi, CEO of PepsiCo (disclosure: client) said that the future of the enterprise depends on its evolution as a force for good. She has realigned her incentives so that “you can’t deliver performance without purpose.” She traced the history of the joint stock company, which provided limited liability for shareholders “because the enterprise owes the society a duty of care.” Michael Porter, whose seminal article in Harvard Business Review has stimulated discussion of shared value, said that “business is at a watershed moment; it is seen as profiting at the expense of the community. We backed ourselves into a narrow view of value creation that ignored important strategic dimensions. We have to rethink the boundaries of corporations. In fact, corporations used to accept more responsibility for communities until governments took that role.” He argues for a new form of sourcing, beyond fair trade agreements that “simply give farmers a larger share of the same pie. You should teach the farmers how to get better yields and create more value, while the company gets better quality goods and a more reliable supply.”

Paul Bulcke, CEO of Nestle, said that entrepreneurs have historically had long term vision with strong values; management must understand the broader context in which business operates. Nooyi made a particular point about the financial community’s obsession with quarterly earnings, leaning over to Professor Porter to say that “MBA schools have missed the message, teaching students only about short term value. I would like to send all of the financial analysts back to school to learn about long-term approach to business.”

6) Energy—As oil prices climb over $100 a barrel, the energy panel predicted that conventional and unconventional technology will extend production on current wells and create new supply. At present in Saudi oil fields, only 55% of the oil is recovered, but with advanced techniques that should rise to 70% within five years. Despite the BP Gulf of Mexico crisis, it is predicted that deepwater drilling will play an ever greater role, with industry committed to a high safety standard. Natural gas will replace coal in many U.S. factories as the leading energy supply. The US is now a major source of natural gas reserves given its ability to mine the shale in the Northeast and West. The price of energy is rising due to demand, especially demand in Asia.

John Krenicki, president and CEO, GE Energy (disclosure: client) suggested that nuclear should play an important role in the future energy supply, but that government guarantees will be needed to provide certainty on financing given the scale of projects. He added that several of the nuclear plants in the U.S. and Russia are at the end of their useful lives and will need to be replaced. Solar and wind are not expected to represent more than five percent of supply within the decade. Coal will play an important role in markets with plentiful supply in the U.S. and China, with optimism on prospects for clean coal.

7) India—The panel expressed great pride in the country’s ability to achieve the same growth rate as China, noting that “it is a country based on consent.” But then the criticism came fast and furious, most passionately about the infrastructure which badly lags China. “India is like a bicycle rider; we have pushed hard to get to the top of the hill but now we are gliding.” Another executive said there must be a fundamental realignment of relationship between business and labor so that the country can increase its manufacturing capability. “Let’s get a consensus with labor whereby they get better enforcement of health and worker rights and we get more flexibility in hours and quality.” Government was criticized for corruption in bidding (telecommunications bid scandal) and for the torturous court system. There is demand for better education, especially for the rural areas, where 65% of kids drop out of school. It was suggested that companies become more involved with the schools, providing skill centers so that students are ready for the workplace.

Wipro and McGraw Hill (disclosure: client) also announced a deal to offer educational material on cell phones--a form of distance learning. Sunil Mittal of Bharti, the telecom giant, said that there are only 83,000 banks in India--leaving 600 million outside of the financial system--but by partnering Bharti with the State Bank of India, he is offering banking by cell phone.

8) Future of Media—I spent nearly a day with the Media and Entertainment community. Besides meeting rocker Peter Gabriel and technology revolutionary Sean Parker, I learned that abstract aggregation of social networks such as Twitter and Facebook has moved toward customization of content and become a second level of editing. Media owners are concerned about the tendency to browse their dot com editions versus the act of completion (Robert Thompson, editor of the Wall Street Journal, describes it as finish-ability) on the print edition. Great stories in mainstream media still drive unbelievable traffic to the dot com sites, with the recent Amy Chua story in the Wall Street Journal yielding 4.5 million page views, 13% of which came via Facebook.

Alan Murray, who runs WSJ.com, said that he has 250 friends on his Twitter feed and that he uses his morning train ride to scan for stories that they think are worthwhile to peruse. Jeff Bewkes, CEO of Time Warner, is sticking with his business model that combines subscription only (HBO) with subscription plus advertising, and an open architecture business strategy that delivers content where consumers want it and how they want it (rent, store in cloud, keep on their device). Note that 30% of people who miss a show will watch it within four days. Media owners are concerned that distribution companies like Amazon may try to disintermediate the producer of content. This was the Davos where Google was eclipsed by Facebook (Google still has the best party!), with brands such as Coca-Cola telling how Facebook fans are 40% more likely to recommend the product and that its 22 million friends are growing at the rate of one million every 10 days. Beatriz Perez, CMO of Coca Cola North America said she is more interested in expressions than impressions, pointing to YouTube where there are 146 million videos involving the brand, only 20% from the company.

Sheryl Sandberg, COO of Facebook, said that those with a smart phone spend 48% of their time on social media and that a friend recommendation yields a doubling in sales. Jeff Jarvis, blogger extraordinaire and consultant to several media companies, talked about the value of editing as increasing efficiency, unbundling the audience to sell a higher value product via micro subscription. He cited Glam Media which puts together the best of blogs and brings the most salient content to the top.

As always, I feel inspired by my immersion in the intellectual ferment that is the Forum. You have to be intelligent every waking minute for fear of being left behind. I find this to be my favorite four days of the year. I would appreciate your comments.

Richard Edelman is the presidnet and CEO of Edelman, the world largest independent public relations firm. This article was originally published as a blog post on Edelman's blog, 6 A.M. Photo Credit: Reuters Pictures

Guess Hu’s in Europe?

Jeffrey Lightfoot — Tue, 09 Nov 2010 09:28:09 -0600

Chinese President Hu Jintao opted not to sit idly in Beijing and watch President Obama circle the Middle Kingdom in his ‘post-shellacking’ tour of Asia. Hu showed that two could enhance the influence of their countries far from home. While both leaders are strengthening long-term ties through their visits, the victor of the flurry of G-2 diplomacy may become apparent as soon as the November 11-12 G-20 summit in Seoul when the U.S. and China clash over the imbalances in the global economy.

Obama’s vist to Asia is about pushing American values, products, and power with the leaders of Asia’s most influential democracies: India, Indonesia, South Korea, and Japan. Arguably the most important tripof his presidency to date, a successful visit will enhance American influence in Asia at a time when many in the region are looking for U.S. leadership to counter an increasingly assertive Chinese posture in the region. Obama’s visit could also bolster the fragile American economy by boosting exports to the world’s fastest growing markets.

Not to be outdone, the Chinese president has just concluded back-to-back state visits to Paris and Lisbon, where he received treatment fit for a king. Following the visit of Chinese Premier Wen Jiabao to Greece and Brussels last month, Hu traveled to Europe to further cement Chinese economic clout and political influence in Western Europe, home to America’s closest allies and partners.

This trip is important not only for China, but for France as well. For President Sarkozy in particular, the stakes are huge. His approval rating sits at 26 percent following a bruising victory over the unions to pass important reforms to the pension system. Next Monday, he is expected to unveil a major reshuffling of the cabinet, including possibly replacing Prime Minister Francois Fillon with Jean-Louis Borloo. Sarkozy will be keen on consolidating these important domestic political achievements by scoring foreign policy victories. Hu’s visit is therefore of extreme importance as France prepares to assume the chairmanship of the G8 and G20 in 2011, just one year before the French presidential election.

Like most foreigners visiting Paris, Hu went on a shopping spree. Instead of visiting the high-end boutiques at the Place Vendome, he committed China to $20 billion of purchases in high technology, including major contracts with Areva and Airbus. France and China set a goal of doubling trade between their two countries from $40 billion to $80 billion over the next five years. Hu also gave China’s political support to France’s 2011 chairmanship of the G-20 and discussed with Sarkozy their shared vision to rebalance the global economy and improve global governance through multilateral institutions, all major foreign policy priorities for the Elysée Palace.

Meanwhile, over the weekend, Chinese Deputy Foreign Minister Cui Tinkai rejected out of hand a U.S. proposal for setting targets to reduce current account imbalances at the G-20, saying it harkened back to the “days of planned economies.” (Tea Partiers take heart: even Chinese Communist Party officials are calling Obama a socialist these days.) He suggested instead that the G-20 summit should focus its attention on what Beijing sees as the real problem: the Federal Reserve pumping money into the global economy and in effect devaluing the dollar relative to other currencies. While China’s Vice Finance Minister Wang Jun softened China’s stance by offering cautious support for QE2 later in the weekend, it is still certain that Beijing will drive a tough bargain at Seoul and vigorously resist any U.S. attempt to forge a coalition of states to criticize China’s currency manipulation. The stage is set for a Mexican standoff between the United States and China in South Korea.

President Hu can be confident that most emerging market economies at the G-20 will not criticize China’s currency manipulation in the absence of coordinated American and European criticism of China. The key, then, is for him to divide the United States from its European allies in Seoul. With Germany already fuming about quantitative easing, France’s neutrality at the summit is essential for China.

Sarkozy demurred when given the opportunity to criticize China’s currency manipulation during their joint press conference in Paris. Will he also remain silent at Seoul and during France’s chairmanship of the G-20 next year? Can China’s $20 billion of contracts signed in Paris buy France’s refusal to back President Obama’s attempts to align the international community against Chinese currency manipulation and address destructive structural imbalances in the global economy? It is too early to tell, but by the conclusion of next week’s G-20 summit in Seoul, it will be clear which of the two world leaders gained the greatest short-term benefit from their simultaneous world travels.

Jeff Lightfoot is an Associate Director of the Atlantic Council's International Security Program. Photo Credit: Associated Press.

China steps up role in Europe

Jorge Benitez — Fri, 15 Oct 2010 10:50:26 -0500

From Antoaneta Becker, the Asia Times: China's increasing financial involvement in debt-ridden European nations has divided observers, inviting comparisons on one side to a Chinese Marshall Plan for Europe, and to a Chinese communist takeover of the continent on the other.

During his week-long tour of European capitals, Premier Wen Jiabao spearheaded an intensive Chinese diplomacy seeking to win skeptics and defuse fears of Beijing's growing international clout.

On his stops in Greece, Belgium, Italy and Turkey, he held talks about bolstering market access for Chinese companies into Europe, signed investment deals and talked long-term action plans for China presence in European countries. The message delivered was unequivocally that China is now an important player on the European financial and economic arena. ...

Wen Jiabao offered to buy more Greek government bonds when Greece returns to borrowing on the international debt markets. He also proposed to set up a US$5 billion fund to support the upgrading of Greece's merchant fleet with Chinese-made ships, and pledged to support more Chinese investments in the Greek economy.

This comes on top of existing agreements to lease and operate the country's main port for 35 years and to build a logistics terminal to connect with southeastern Europe. ...

Greece is hardly the only European country where officials are looking at China as the possible underwriter of their countries' economic recovery. Earlier this year, Beijing bought 400 million euros (US$558 million) of Spanish government debt. Portugal and Ireland, both threatened with debilitating debt or bailout costs, are also said to be courting Chinese lending. ...

"For Europe, China is a bargaining chip that increases its clout versus the US," says Zhang Guoqing, pubic policy researcher with the School of Government at Beijing University. "Europe is clear that while some people in Washington are preparing to wage a trade war with China, this is their opportunity to boost trade and investment from China." (photo: Getty) (via Atlantic-Community)

Canada, EU on track for free trade deal in 2011: minister

Jorge Benitez — Sat, 17 Jul 2010 10:17:49 -0500

From AFP: Canada and the European Union will meet their target to sign an "ambitious" free trade agreement in 2011, Canadian International Trade Minister Peter Van Loan said Thursday in Bucharest.

"All the signs right now indicate that we will meet our target of an agreement in 2011 that is ambitious and broad," Van Loan said during a press conference.

A fourth round of negotiations is currently taking place in Brussels.

"After a fifth round in October in Canada, difficult political negotiations will occur and the agreement-drafting will occur," the minister added.

The European Union is Canada's second-largest export market, largely behind the United States. (photo: Reuters)

German Business Moves Beyond Russia to China

Jorge Benitez — Thu, 15 Jul 2010 07:42:20 -0500

From Judy Dempsey, the New York Times: While the Moscow-Berlin political relationship gets a lot of attention, German companies have come to realize that the money to be made in Russia is overshadowed by the prospects even farther afield in China.

Germany is China’s biggest trading partner by far in Europe, and the trade is increasing by leaps and bounds, especially for high-value electrical and electronic goods. Germany’s car industry, which suffered greatly during the global financial meltdown, has recovered thanks in large part to a surge in Chinese demand for the top range of German cars — Bayerische Motoren Werke raised its 2010 forecasts on Tuesday for that very reason. ...

The new focus is evidenced by a trade mission being led by Chancellor Angela Merkel, starting Wednesday: For the first time, she is combining Russia and China in one trip — with energy-rich Kazakhstan thrown in for good measure. ...

Overall, German exports to China amounted to €36.5 billion, or $46.2 billion, last year, and imports totaled €55.5 billion, according to the German Federal Statistics Office. That was relatively unchanged from 2008, despite the economic crisis. By comparison, German trade with Russia fell 30 percent or more: imports were €24.9 billion while exports were €20.5 billion.

During the first four months of this year, German exports to China jumped nearly 50 percent over the same period in 2009, to €16.1 billion. That was spurred not only by China’s stimulus package but the shift in economic development. German exports to Russia were €7.1 billion, up around 25 percent. ...

Mrs. Merkel plans to spend two days in Russia, then Friday and Saturday in China, where she is to hold talks with President Hu Jintao and Premier Wen Jiabao. She is stopping Sunday in Kazakhstan on her way home. Accompanying her are representatives of 25 companies, including Martin Winterkorn, chairman of VW; Thomas Enders of Airbus; Peter Löscher of Siemens; and Eckhard Cordes, the head of Metro. (photo: Getty)

Turning East, Turkey Asserts Economic Power

Jorge Benitez — Tue, 06 Jul 2010 08:15:44 -0500

From Landon Thomas Jr., the New York Times: For many in aging and debt-weary Europe, which will be lucky to eke out a little more than 1 percent growth this year, Turkey’s economic renaissance — last week it reported a stunning 11.4 percent expansion for the first quarter, second only to China — poses a completely new question: who needs the other one more — Europe or Turkey?

“The old powers are losing power, both economically and intellectually,” said Vural Ak, 42, the founder and chief executive of Intercity, the largest car leasing company in Turkey. “And Turkey is now strong enough to stand by itself.”

It is an astonishing transformation for an economy that just 10 years ago had a budget deficit of 16 percent of gross domestic product and inflation of 72 percent. It is one that lies at the root of the rise to power of Prime Minister Recep Tayyip Erdogan, who has combined social conservatism with fiscally cautious economic policies to make his Justice and Development Party, or A.K.P., the most dominant political movement in Turkey since the early days of the republic.

So complete has this evolution been that Turkey is now closer to fulfilling the criteria for adopting the euro — if it ever does get into the European Union — than most of the troubled economies already in the euro zone. It is well under the 60 percent ceiling on government debt (49 percent of G.D.P.) and could well get its annual budget deficit below the 3 percent benchmark next year. That leaves the reduction of inflation, now running at 8 percent, as the only remaining major policy goal. ...

In Iran, Turkish companies are building fertilizer plants, making diapers and female sanitary products. In Iraq, the Acarsan Group, based in the southeastern town of Gaziantep, just won a bid to build five hospitals. And Turkish construction companies have a collective order book of over $30 billion, second only to China. (photo: Reuters)