Peterson Institute for International Economics Update Newsletter
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PIIE Update Newsletter
June 28, 2012

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  New Book
Transatlantic Economic Challenges in an Era of Growing Multipolarity

Jacob Funk Kirkegaard, Nicolas Véron, and Guntram B. Wolff, editors
  Transatlantic Economic Challenges in an Era of Growing Multipolarity Shifts in global economic dominance are by nature tectonic and never precipitated by single events. The Great Recession of 2008–09, however, has presented the European Union, its common currency the euro, and the United States with new global challenges. The transatlantic partnership has dominated the world economy since the early 20th century and, based upon US and European values and interests, has designed and sustained all its principal global political and economic institutions.

But countries outside the European Union and United States now account for about half of the world economy, and in the aftermath of the Great Recession their share is growing rapidly. Hence their increasing role and concomitant demands for greater influence over global economic governance pose a series of challenges and opportunities to the European Union and the United States, as illustrated by the eclipse of the G-8 by the G-20.

The contributions in this volume by subject area experts from the Peterson Institute for International Economics and Bruegel ponder how or whether the rise of outside actors of potentially equal, or even greater, economic weight will invariably force a rethinking of not only how the European Union and the United States should conduct policy externally towards the new rising economic poles, but also of the substantive contents of the EU-US bilateral economic and political relationship.

>> Preview and purchase the book

  Policy Brief 12-18
The Coming Resolution of the European Crisis: An Update

C. Fred Bergsten and Jacob Funk Kirkegaard
  The euro crisis is fundamentally a political crisis. At its core the crisis is about national sovereignty and the process in which European governments can agree to transfer it to new, required euro area institutions governing banking sectors and fiscal policies. This transfer of national control over domestic banking sectors and fiscal policy, say Bergsten and Kirkegaard, will happen only during an extraordinary crisis. An imminent economic catastrophe is almost certainly needed to overcome daunting political obstacles, which during normal political times is nearly impossible to accomplish. For this reason, the euro area policy response can only be reactive. Proactive decisions to resolve the crisis in one fell swoop are politically impossible and unrealistic. The authors put forward the "on the brink" theory to characterize the current process of European economic integration. Ultimately, the threat of imminent collapse of the European financial system and indeed the common currency itself would prompt euro area policymakers to take every feasible step to avoid it, including transferring sovereignty to new institutions. The threat, while it exists, is not as imminent as most mainstream commentary makes it out to be. Europe is more solid and has more time to fix its problems than financial markets and analysts think. But leaders urgently need to take a number of very far-reaching political decisions, in particular on banking and fiscal union, during 2012. Every gradual step, however small, that policymakers take on the brink is a step toward completing the decades-long political project and should not be underestimated.

>> Read full policy brief [pdf]
>> See also: Did the G-20 Help the Euro Area?

In India, Not All Capital Inflows Are Welcome

Arvind Subramanian
  Arvind Subramanian The recent Indian policy announcements meant to restore investor confidence—in the form of further significant opening of the capital account—deserve a failing grade. Most analysts believe that the policy changes will at best succeed in attracting capital and at worst will fail to do so. This conclusion is wrong. The policy changes are bad on substance. They are possibly also troubling for what they signal about the independence of one of the few competent institutions left—the Reserve Bank of India (RBI). Foreign capital has headed for the exit because of fundamental doubts about this government's fiscal and growth policies. To open the capital account in response will either be effective and dangerous today or ineffective today and dangerous tomorrow.

>> Read full op-ed

Putin's Eurasian Illusion Will Lead to Isolation

Anders Åslund
  Anders Aslund The strangest part of President Vladimir Putin's new policy is his promotion of the Eurasian Union, which is likely to be costly and unsuccessful. In fact, the Eurasian Union is unlikely to attract anyone beyond its current three members. It will cause considerable trade diversion as Belarus and Kazakhstan have been forced to adopt the higher Russian import tariffs. Both countries demand direct payments from Russia as compensation. Meanwhile, other post-Soviet countries restrain their trade with Russia. A Commonwealth of Independent States (CIS) multilateral free trade agreement, by contrast, would make perfect sense. A third version was concluded last October. It can be based on World Trade Organization principles and combined with free trade agreements with the European Union, which would maximize global integration for all. But given Russia's poor reputation in the CIS, only eight states have signed it, with Azerbaijan, Turkmenistan, and Uzbekistan refusing. So far, only Russia and Belarus have ratified it, and it may never come into force. By persistently bullying the other CIS countries, Russia fails to achieve even minimum cooperation that would benefit all members. Russia's promotion of the Eurasian Union does not lead to further political and economic integration but to Russia's isolation with Belarus and Kazakhstan at great cost to the Kremlin. The only possible neo-imperialist achievement is the long-proposed union state with Belarus. How long will Putin pursue this harmful policy?

>> Read full op-ed

Moldova Deserves PNTR As Well

Anders Åslund
  Congress is turning its attention to granting Russia permanent normal trade relations (PNTR). This could lead to a doubling of US exports of merchandise and services to Russia from $11 billion last year to $22 billion in 2017. If the United States does not offer Russia PNTR, it would suffer from discrimination on the Russian market, since neither side would apply the beneficial World Trade Organization (WTO) trading conditions after Russia becomes a member of the WTO in August. In his letter to Senator John McCain (R-Ariz.) and other senators, Senator Max Baucus (D-Mont.) stated: "I also want to reiterate my strong support for extending PNTR status and repealing Jackson-Vanik for Moldova... I believe the Senate should repeal Jackson-Vanik and extend PNTR for Moldova at the same time that we do so for Russia." That would make perfect sense. Today the Jackson-Vanik Amendment is entirely obsolete. It is aimed at a country that no longer exists, focusing on an issue—emigration—that has not caused concern since the end of the Soviet Union. It is bad enough that it applies to Russia, but it makes no sense at all to apply it to small, friendly, formerly Soviet countries. As ex-communist countries have joined the WTO, they have regularly been granted PNTR. Only one country, small Moldova, has joined the WTO but not been granted PNTR. As Senator Baucus has suggested, when the Congress grants PNTR for Russia, it should do so for Moldova as well.

>> Read full op-ed

Peterson Perspectives Interviews

audio  Europe after the Greek Election, Part II
Jacob Funk Kirkegaard says that while the bond markets remain dubious about Europe, there are signs of progress as Europe stumbles toward fiscal and political union and banking reforms.

audio  Europe after the Greek Election, Part I
Jacob Funk Kirkegaard explains that Prime Minister Antonis Samaras may get some "wiggle room" from European overseers but still faces a tough agenda of deregulation and austerity.

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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The Fed Shirks Its Duty

What Is Next in Europe?

Egypt: To Have or Not to Have an IMF Program?

Financial Repression and the One-Child Policy

Why Internal Devaluation Is Advantageous
  China's Wild West Interest Rate Liberalization

The Chinese Growth Model: Before and After the Crisis

Financial Repression and the One-Child Policy

The Politics of a Chinese Slowdown

Capital Stock....and Flow
  Korea Peninsula Security Report: External Instability Begets Internal Stability

Slave to the Blog: Ukraine, OPCON Transfer, UN Panel of Experts


The Treasure of the Sierra Madre in Our Own Style

Such Great Heights

PIIE Noted in the News and on the Web

The Washington Post's Think Tanked Blog
Robert B. Zoellick from World Bank to Peterson Institute
The Washington Post's Think Tanked blog writes that Robert B. Zoellick will be joining the Peterson Institute to research the relationship between economics and security.

Wall Street Journal Real Time Economics Blog
World Bank Chief Zoellick Heads to D.C. Think Tank
The Wall Street Journal's Real Time Economics blog writes Robert B. Zoellick will be taking his talents from the World Bank to the Peterson Institute for International Economics.

Nightly Business Report
Banking Union to Solve Crisis
Jacob Funk Kirkegaard says that the European Central Bank, as an independent institution, is much more likely to be tougher on the banks in Spain, Ireland, France, or Italy than national regulators in these countries.

CTV News' National Affairs
Critical Euro Area Meetings
Jacob Funk Kirkegaard explains that the upcoming European summit on June 28–29 will not be a summit to end all summits, but merely another step in the long, drawn-out process of resolving the escalating debt crisis in Europe. (Kirkegaard appears at 2:20 mark.)

The Atlantic Council
The Eurozone Crisis After the Greek Elections
Jacob Funk Kirkegaard joins C. Boyden Gray, US ambassador to the European Union, and Ulrike Guerot, European Council on Foreign Relations, in a discussion held by the Atlantic Council on the euro area crisis following the Greek elections.

The Prospect
California's Lesson for the Euro
Drawing on comparison with the United States, C. Randall Henning explains how fiscal federalism can protect Europe's monetary union from irresponsible members.

Financial Times
Temperature Drops in Currency Wars for G-20
The Financial Times cites William R. Cline and John Williamson's currency calculations in their Policy Brief: Estimates of Fundamental Equilibrium Exchange Rates, May 2012, the latest in their biannual report.

Preview of Our Next Issue

Why Toomas Ilves Is Right and Paul Krugman Is Wrong
Anders Åslund

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