A Populist Surge Is Pulling Three U.S. Allies Into Political Crises

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Leaders in America’s top 3 European Allies face Crisis

  1. Britain: Teresa May tries to manage a Brexit vote motivated by anti-immigration
  2. France: Emmanuel Macron faces rioting in the streets over a carbon tax
  3. Germany: Angela Merkel has to step down as leader amid backlash over middle east immigration

The Hollowing Out of the G20

Since helping to mitigate the global financial crisis, the G20 has degenerated from a platform for action to a forum for discussion. In the age of Donald Trump, it could sink even further, becoming a vehicle for legitimating illegal behavior, from Russia’s aggression in Ukraine to Saudi Arabia’s murder of a journalist.

.. Now, instead of jostling for pictures of Trump and Xi, the world’s media will be dissecting interactions between MBS, accused of ordering the brutal torture and murder of the US-based Saudi journalist Jamal Khashoggi in the Saudi consulate in Istanbul, and Turkish President Recep Tayyip Erdoğan. Those between Russian President Vladimir Putin with German Chancellor Angela Merkel – which would have been uncomfortable even without the recent attack on Ukraine – will also be heavily scrutinized.
.. None of this is the point of a G20 summit. What used to be an effective forum of global governance has now degenerated into a kind of Kabuki theater – a faithful reflection of the extent to which the global order has lost its way.
.. After the global financial crisis erupted in 2008, the G20 acted as an international crisis committee, mitigating the disaster by injecting liquidity into markets worldwide. The effectiveness of the G20’s 2008 and 2009 summits raised hopes that, at a time of rapid change, this emerging platform, comprising economies accounting for 85% of world output, could serve as a global fire brigade. Not bound by procedural rules or legal strictures, the G20 could respond quickly when needed. There was even talk of the G20 intervening in a wider range of areas, potentially even eclipsing the United Nations Security Council.

Trump’s trip to Europe was a complete disaster, and not because he acted like a boorish bully

On his recent visit to Europe, he managed to convey once again his contempt for America’s European allies, and to demonstrate that he places more value on his own personal comfort than on the sacrifices that US soldiers have made in the past.

The trip itself cost millions of taxpayer dollars, yet Trump chose to skip a key ceremony honoring US war dead at Aisne-Marne American Cemetery because it was raining.

The White House offered up a cloud of unconvincing excuses for Trump’s absence, but other world leaders were not deterred by the fear of a few raindrops, and neither were past presidents ObamaClinton, Bush, or Kennedy back in their day.

By choosing to stay warm and dry in his hotel room while other world leaders acknowledged the heroism of those who fought and died for freedom, Trump gave the concept of “American exceptionalism” a whole new meaning.

Overall, Trump seemed intent on proving that while the obligations of being president might force him to go on such trips, he doesn’t have to behave himself while he’s there.

For example, Trump is correct to accuse China of engaging in a variety of predatory trade practices and of failing to live up to its World Trade Organization commitments. He is also right when he complains that Europe has neglected its own defenses and relies too much on American protection (though he still seems to think NATO is a club with membership dues)..

He is hardly the first US official to criticize European defense preparations but being unoriginal doesn’t make it wrong.

Trump is also correct in his belief that Europe, Russia, and the United States would be better off if the divisions that presently divide them could be bridged or at least alleviated.

It would be better for Europe if Russia withdrew from Ukraine, stopped trying to intimidate the Baltic states, and stopped murdering former spies in foreign countries.

It would be good for Russia if Western sanctions were lifted and it no longer had to worry about open-ended NATO expansion. And it would be good for the United States if Russia could be pulled away from its increasingly close partnership with China.

For that matter, Trump wasn’t wrong to see North Korea’s nuclear and long-range missile programs as a serious problem that called for creative diplomacy.

The real problem is that Trump has no idea what to do about any of these issues, and he seems incapable of formulating a coherent approach to any of them. To the extent that he does have an actual policy toward Europe, for example, it is the exact opposite of what the United States ought to be doing.

Trump’s broad approach to Europe is one of “divide and rule.” He’s called the European Union a “foe” of the United States, and he has backed a number of the political forces that are now roiling the Continent and threatening the EU’s long-term future.

He endorsed Brexit, expressed his support for Marine Le Pen in France, and thinks well of illiberal leaders like Viktor Orban of Hungary and Andrzej Duda of Poland. Why? Because he thinks dividing Europe into contending national states will allow the larger and more powerful United States to bargain with each European state separately rather than face all of them together, and thus secure better deals for itself.

This approach might be termed “Neanderthal realism.” Playing “divide and rule” is a good idea when dealing with real enemies, but it makes no sense to sow division among countries with whom one has generally friendly relations and close economic ties, and when their collective support might be needed in other contexts.

This approach also runs counter to Trump’s stated desire to reduce US security commitments to Europe and to get Europe to take on greater responsibility for its own defense.

If you really want the United States to get out of the business of protecting Europe, you should also want Europe to be tranquil, capable, prosperous, and united after the United States withdraws. Why? So that Washington doesn’t have to worry about developments there and can focus its attention on other regions, such as Asia.

A Europe roiled by xenophobia, resurgent hyper-nationalism, and persistent internal wrangling wouldn’t be to America’s advantage; it would be just another problem area we’d have to keep an eye on.

Nor would a divided Europe be of much use in addressing any of the other problems on America’s foreign-policy agenda.

Why doesn’t Trump see this? Possibly because he is reflexively relying on the same tactics that brought him to the White House.

It has worked tolerably well here in the United States, because a lot of Americans are still angry or fearful and Trump is both shameless and adept at fueling those emotions. This same instinct leads him to behave abominably abroad: Insulting British Prime Minister Theresa May and London Mayor Sadiq Khan, deriding Prime Minister Justin Trudeau of Canada as “Very dishonest & weak” or derisively tossing Starburst candies to German Chancellor Angela Merkel during a meeting of G-7 leaders.

.. The problem, of course, is that the boorish behavior and conflict-stoking policies tend to backfire on the world stage.

.. Trump’s bullying bluster didn’t win big trade concessions from Canada, Mexico, or South Korea; the shiny “new” trade deals Trump negotiated with them were nearly identical to the old arrangements and in some ways inferior to them.

And given how Trump has treated America’s allies, why would May, Merkel, Macron, Abe, or Trudeau do him (or the United States) any favors? The declining US image abroad compounds this problem, as foreign leaders know their own popularity will suffer if they help Trump in any way.

.. Trump’s personal conduct is not even the biggest problem. Arguably, an even bigger issue is the strategic incoherence of his entire transactional approach. His overarching objective is to try to screw the best possible deal out of every interaction, but this approach instead makes it more difficult for the United States to achieve its most important foreign-policy goals.

.. Threatening trade wars with allies in Europe or Canada makes little sense from a purely economic perspective, for example, and it has made it harder for the United States to address the more serious challenge of China’s trade policies.

If Trump were as worried about China’s trade infractions as he claims to be, he would have lined up Europe, Japan, and other major economic actors and confronted China with a united front. Similarly, pulling out of the Iran nuclear deal and threatening allies with secondary sanctions not only raises doubts about America’s judgment (because the deal was working, and the Europeans know it); it just fuels further resentment at America’s shortsighted bullying.

.. It is increasingly clear that Trump was never the brilliant businessman he claimed to be; he got most of his wealth from his father using various shady tax dodges, and the Trump Organization may have been heavily dependent on illegal activities like money laundering.

.. We should focus less on his personal antics and inadequacies and focus more on his inability to formulate effective policies, even on issues where his instincts are in fact mostly correct.

.. Sadly, the 45th US president possesses a world-class ability to get things wrong, even when he’s right.

The Global Impact of a Chinese Recession

Most economic forecasts suggest that a recession in China will hurt everyone, but that the pain would be more regionally confined than would be the case for a deep recession in the United States. Unfortunately, that may be wishful thinking.

CAMBRIDGE – When China finally has its inevitable growth recession – which will almost surely be amplified by a financial crisis, given the economy’s massive leverage – how will the rest of world be affected? With US President Donald Trump’s trade war hitting China just as growth was already slowing, this is no idle question.

.. First, the effect on international capital markets could be vastly greater than Chinese capital market linkages would suggest. However jittery global investors may be about prospects for profit growth, a hit to Chinese growth would make things a lot worse. Although it is true that the US is still by far the biggest importer of final consumption goods (a large share of Chinese manufacturing imports are intermediate goods that end up being embodied in exports to the US and Europe), foreign firms nonetheless still enjoy huge profits on sales in China.

Investors today are also concerned about rising interest rates, which not only put a damper on consumption and investment, but also reduce the market value of companies (particularly tech firms) whose valuations depend heavily on profit growth far in the future. A Chinese recession could again make the situation worse.

.. High Asian saving rates over the past two decades have been a significant factor in the low overall level of real (inflation-adjusted) interest rates in both the United States and Europe, thanks to the fact that underdeveloped Asian capital markets simply cannot constructively absorb the surplus savings.

.. instead of leading to lower global real interest rates, a Chinese slowdown that spreads across Asia could paradoxically lead to higher interest rates elsewhere – especially if a second Asian financial crisis leads to a sharp draw-down of central bank reserves. Thus, for global capital markets, a Chinese recession could easily prove to be a double whammy.

.. a significant rise in global interest rates would be much worse. Eurozone leaders, particularly German Chancellor Angela Merkel, get less credit than they deserve for holding together the politically and economically fragile single currency against steep economic and political odds. But their task would have been well-nigh impossible but for the ultra-low global interest rates

.. Today, however, debt levels have risen significantly, and a sharp rise in global real interest rates would almost certainly extend today’s brewing crises beyond the handful of countries (including Argentina and Turkey) that have already been hit.

.. Nor is the US immune. For the moment, the US can finance its trillion-dollar deficits at relatively low cost. But the relatively short-term duration of its borrowing – under four years if one integrates the Treasury and Federal Reserve balance sheets – means that a rise in interest rates would soon cause debt service to crowd out needed expenditures in other areas. At the same time, Trump’s trade war also threatens to undermine the US economy’s dynamism.

.. Its somewhat arbitrary and politically driven nature makes it at least as harmful to US growth as the regulations Trump has so proudly eliminated. Those who assumed that Trump’s stance on trade was mostly campaign bluster should be worried.

.. A recession in China, amplified by a financial crisis, would constitute the third leg of the debt supercycle that began in the US in 2008 and moved to Europe in 2010. Up to this point, the Chinese authorities have done a remarkable job in postponing the inevitable slowdown. Unfortunately, when the downturn arrives, the world is likely to discover that China’s economy matters even more than most people thought.

When Donald Met Vladimir: The Transcript

Guidance from a like-minded leader.

.. But when you of all people criticize the pipeline, you force Berlin to support it is as a matter of national pride and principle!

This is the essence of tradecraft: to convince those whom you seek to manipulate that they are thinking and acting for themselves.

.. May we also say how much we admire how you have discredited the F.B.I. and the rest of your so-called deep state? To rally your supporters and confound your opponents by conjuring imaginary enemies is a method we have profitably employed for over a century, most recently in Ukraine.

.. Donald, we have the same goals. We want to defend the great Christian civilization of your Scottish and German ancestors against barbarians from the southlands. Yet we are being stabbed, stabbed in the back, by the exact same people! I mean global capitalists like George Soros and Bill Browder and he-women like Hillary and Merkel and feminized men like Barack Obama who have no will to fight!

We must turn to face these backstabbers, Donald, not let the deep state manipulate us into fighting each other.

Why Merkel Must Go

But Germany has been infected with the temper of the times. The proximate cause is a bitter dispute over asylum laws between Seehofer, who leads Bavaria’s conservative Christian Social Union, and Chancellor Angela Merkel of the Christian Democratic Union, which is the C.S.U.’s more centrist sister party outside Bavaria.

.. That will most likely require setting up border controls and checkpoints, meaning an end to the borderless Continent that is the most visible expression of European unity.

.. The deeper cause of the crisis, however, is that the C.S.U., which has dominated Bavarian politics for decades, is threatened by the growing popularity of Alternative for Germany, or AfD, the bigoted nativist party that is now the country’s third largest. That’s in part because the C.D.U. has dragged its Bavarian sister too far to the left, creating an opportunity for the AfD among traditional conservative voters.

.. But mostly it’s because Merkel created the conditions that gave the enemies of the European ideal their opening. She refused to cap the number of asylum seekers Germany would take and then pleaded with other European countries to take them. That almost certainly gave Brexiteers the political imagery they needed to carry the vote a year later. The AfD was a minor Euroskeptic party before the refugee crisis gave it a rallying cry. The xenophobes of Austria’s Freedom Party, Italy’s Northern League and Sweden’s Democrats have all profited politically from Merkel’s decision.

.. Knowing how to set broad but clear limits is one of the essentials of conservative governance. Merkel’s failure is that she ceased to be conservative.

.. Admirers still speak of Merkel as if she is Europe’s last lion, the only leader with the vision and capacity to save the E.U. There is much that is admirable about the chancellor, but as things now stand she is likelier to be remembered as the E.U.’s unwitting destroyer. The longer she’s in office, the more the forces of reaction will gain strength. And isn’t 13 years in office more than enough?

.. There is still time for the E.U. to be saved. Europe needs a real security policy, backed by credible military power and less dependence on Russian energy. It needs to regulate migration strictly outside its borders so that it can remain open within them. It needs robust economic growth and much lower rates of unemployment, not paeans to the virtues of sustainability and work-life balance. And it needs institutions in Brussels that aren’t mere regulatory busybodies trying to punish member states for being economically competitive.

.. What’s the alternative? A passage from Norman Davies’s magisterial history of Europe suggests the darker possibilities:

“Inter-war politics were dominated by the recurrent spectacle of democracies falling prey to dictatorship.” He continued: “It cannot be attributed to any simple cause, save the inability of Western Powers to defend the regimes which they had inspired. The dictators came in all shapes and sizes — communists, fascists, radicals and reactionaries, left-wing authoritarians (like Pilsudski), right-wing militarists (like Franco), monarchs, anti-monarchists, even a cleric like Father Tiso in Slovakia. The only thing they shared was the conviction that Western democracy was not for them.”

The stakes are too high for a muddler like Merkel to stick around

Can the Euro Be Saved?

Across the eurozone, political leaders are entering a state of paralysis: citizens want to remain in the EU, but they also want an end to austerity and the return of prosperity. So long as Germany tells them they can’t have both, there can be only one outcome: more pain, more suffering, more unemployment, and even slower growth.

.. The backlash in Italy is another predictable (and predicted) episode in the long saga of a poorly designed currency arrangement, in which the dominant power, Germany, impedes the necessary reforms and insists on policies that exacerbate the inherent problems, using rhetoric seemingly intended to inflame passions.
.. Italy has been performing poorly since the euro’s launch. Its real (inflation-adjusted) GDP in 2016 was the same as it was in 2001.
.. From 2008 to 2016, its real GDP increased by just 3% in total.
.. the euro was a system almost designed to fail. It took away governments’ main adjustment mechanisms (interest and exchange rates); and, rather than creating new institutions to help countries cope with the diverse situations in which they find themselves, it imposed new strictures – often based on discredited economic and political theories
.. The euro was supposed to bring shared prosperity, which would enhance solidarity and advance the goal of European integration. In fact, it has done just the opposite, slowing growth and sowing discord.
.. Emmanuel Macron, in two speeches, at the Sorbonne last September, and when he received the Charlemagne Prize for European Unity in May, has articulated a clear vision for Europe’s future. But German Chancellor Angela Merkel has effectively thrown cold water on his proposals, suggesting, for example, risibly small amounts of money for investment in areas that urgently need it.
.. In my book, I emphasized the urgent need for a common deposit insurance scheme, to prevent runs against banking systems in weak countries.
.. The central problem in a currency area is how to correct exchange-rate misalignments like the one now affecting Italy. Germany’s answer is to put the burden on the weak countries already suffering from high unemployment and low growth rates.
..  The alternative is to shift more of the burden of adjustment on the strong countries, with higher wages and stronger demand supported by government investment programs.
.. Matteo Salvini, the party’s leader and an experienced politician, might actually carry out the kinds of threats that neophytes elsewhere were afraid to implement. Italy is large enough, with enough good and creative economists, to manage a de facto departure – establishing in effect a flexible dual currency that could help restore prosperity.
.. Whatever the outcome, the eurozone will be left in tatters.
.. It doesn’t have to come to this. Germany and other countries in northern Europe can save the euro by showing more humanity and more flexibility. But, having watched the first acts of this play so many times, I am not counting on them to change the plot.