Schroeder banks Wolfowitz for head of the World Bank, cutting off a bruising fight over his nomination. This
despite doubts over his suitability, a
widely acknowledged conflict of interest and opposition both from
within his own party and
continued hostility from the Swiss and Dutch governments.
What's going on here? The answer to this question lies in the EU economic summit which is going to be focused on the sluggish growth and horrible jobs picture in Europe, which has 8.9% unemployment and several countries facing structural budget deficits that are above the Maastricht Treaty limits.
But it is the big picture that Schroeder and Chirac are looking at, and that picture suggets that concilation is not the order of the day.
[Cross posted at The Agonist]
The Hard Part about the long term, is getting there
Europe faces high unemployment and sluggish growth, that is what is on the agenda for the meeting of finance ministers. The internal pressures and divisions within Europe have been noticed by currency traders and this has lead to a small dollar rally. The admission, even on the part of dollar bulls, is that there are structural difficulties facing any long term move upwards in the dollar - Europe has the advantage of producing almost twice as much GDP per BTU burned, and it has a larger market with greater Unity than the North American Free Trade zone. However, in the short term, rising materials prices are biting into resource poor Europe more than in the United States. With the Chinese deflation engine still running, admittedly not quite as hot as before, this is making it so that while US Producer inflation is running at nearly 5% there is deflation in many sectors of the US economy in consumer prices. In a world where oil is between 50 and 60 dollars a barrel, long term, the European economy has tremendous advantages, because the US will have to reign in both its trade deficit and its budget deficit. But the problem with the long term is getting there.
Hence Schroeder's move on Wolfowitz: he is not, in fact, giving up anything substantive. Since Bush was determined to force Europe to "kiss the glove" on neocon unilateralism, there was little doubt that he would go through. The only question is whether Europe would make a staged fight over the issue. Which brings us back to Schroeder and Chirac and their political problems. Neither needs to make a show of opposing Bush for political purposes, both know that their electorates are angry at the US policies and Bush, but they also know that the anger is not at the boiling over point, where as the anger over employment and economic growth is. Their first priority is to set Europe's house in order, and to do that they must pass the European Constitution - and to do that they need to ease the Maastricht restrictions on budget deficits, so that their constituents don't "blame Europe" for the current economic difficulties.
Acceptability of the Euro in France and Germany is continuing even with "stubbornly high unemployment. To the end of keeping this acceptability going, the Eurozone nations eased controls on fiscal policy, but not enough to deliver a knock out dose of Keynesian stimulus. Instead the pact has been revised to allow countries facing "slowing growth" to avoid penalties. This buys Europe time, but the question is what the longer term direction is going to be, short term this will help buoy the dollar, but only on the margins.
The issue at stake at the moment is liberalisation of the vast European services sector. Britain wants liberalization, trying to use services growth to offset what is expected to be a slowing in housing and oil related growth. France, in particular, does not want to see competition for service jobs opened up, and the consequent dislocation, while it's ruling coalition is under pressure both at the polls and from France's own technocratic elite. This requires a bit of explanation: the centre-right governing coalition was hammered last year in local elections, and sees that the public in France is not willing to go forward with more integration with Europe at the present time. However, France's technocrats have expressed dismay both that Chirac seems to have weakened his support for the social aspects of French government, and has failed to put his weight behind the treaty. One French source echoes sentiments that are expressed in softer terms in public by saying that Chirac is not doing his job as President of the Republic by arguing for the people in European Union circles, and for the European Union to the people, since, in the view of many French technocrats, the interests of the two are ultimately aligned.
While phrased in terms of "neo-liberalism", the question is more one of old-fashioned horse trading: given that Europe's growth is limited for the time being, how is the pain to be distributed. The feeling in Berlin is hard to gauge: there have been mutters that Britain attempting to take more than its fair share of E25 growth, but also a recognition that the European Union must, ultimately, liberalise services. German Finance Minister gave guarded support for services liberalisation. He also wants to maintain more spending authority inside of Germany - keeping his opposition to raising the EU budget limit to 1.14% from the current 1%.
Chirac has been far more forthright: he wants a prohibition on race to the bottom tactics which he calls "social dumping" and he demands that there be "fair competition" standards built in, so that France's relatively high labor price environment will not be caught in a squeeze play: the UK can use the strong oil backed pound to invest in poorer European countries, and then repackage those services to undercut French labor.
What all of this means is as follows: Europe recognizes that it must get out of the current economic crisis, not with brute force methods, and not by undermining the basic structure of European integration - but it is pursuing flexibility for time to do this. The various EU states are also engaged in internal bargaining as to how much of limited E25 growth each member will get.
It is because of this that Schroeder and Chirac, while not bending on the long term European policy of strong wages and strong social consensus, are also not willing to pursue side issues that generate controversy, but which ultimately spend political capital that both desperately need as the national election cycles approach in Europe. Germany and France are both focused on the bottom line, and that bottom line is greater European unity, and their priority is, then, pursuing enough flexibility to get there, without having to give away the store on labor rules, tax policy, social programs, national autonomy and budget policy.
This means that, in the medium term, the mild dollar stabilization and rally that we have seen will continue, particularly if the Federal Reserve drops its "measured" raising of rates. This will happen if Greenspan believes that China is no longer holding down wages and capital returns and that, as a result, the rampant commodities inflation will become general consumer inflation.
The China Syndrome
Thus the third leg of the triangle is what the oil producing states are going to do, and what the Asian economies are going to do. The most important players in this realm are Saudi Arabia and China. China's plan has been simple, they want to maintain a two currency economy, but gradually soften the boundary between those two currencies. For some time China had two currencies officially, intern RMB, and external Foreign Exchange Currency. Then they unified the currency, but had convertibility controls and a fixed dollar peg. They are increasing the trading range of that peg, because of the increased uncertainty around the dollar: Chinese banking authorities do not want to be caught in a position where there is a large move in the dollar and China is forced to rapidly follow suit. With day to day volatility of the dollar as high as 1.5%, they are loosening the trading range of the Yuan, in order to give themselves more flexibility in meeting the demands of a fixed exchange rate. The move to a 5% trading range was advised in February and steps to broaden the range of currency transactions to give the central bank more flexibility have already been announced. Hong Kong, in particular, hopes to see large hot money inflows should there be steps toward revaluing the Yuan, as there is enormous pent up demand to "get into China". This has spilled over to moves into South Korea, on the believe that South Korea will benefit from Chinese expansion - particularly in supplying steel and equipment.
However, the ultimate Chinese monetary authority goal is to get full access to the world's resource markets, China is very dependent on resource imports, and Chinese demand, particularly for steel, has driven commodity prices upwards. However, the weak Yuan is a powerful tariff effect on foreign imports. China's goal is to keep the two currency system, only submerged: sign long term oil deals, which will flow into the planned economy of capital growth, and allow Chinese companies to buy oil and other resources on the open market for domestic consumption. This way their capital development will stay on track, and they can use the finance ministry to give access to the "producer Yuan", while consumption will come out of a "consumer Yuan". In effect, there will be one set of prices for those engaging in planned development, and another for privately driven development. The Chinese government has taken steps to reign in housing and local capital projects to advance this policy.
Europe ultimately wants to sell to China, and China, ultimately knows that its interest in establishing a Chinese sphere of influence in the pacific - to include Taiwan and ultimately Singapore as areas of strong control, while having great influence and monetary centrality in Indonesia, parts of Pacific South America and Indochina - will conflict with US superpower status. China wants to play Europe against the United States, in the immediate time frame on the issue of arms sales.
In brief, short term China is still committed to supporting US monetary policy, but that support is coming at an increasingly stiff geopolitical price, and China has not set aside their longer term policy goal of monetary independence from the dollar, nor their goal of creating a sphere of influence backed by military, as well as economic force.
Peace for Sand Deals
The key player in OPEC is Saudi Arabia, and their control over the price of oil rests on two basic factors, first, they have some swing capacity left, and second, they are the source of the funding of many of the disruptions of oil supply. This is likely to make me a PNG in the oil kingdom for saying it, but if you want to track the rise and fall of the fortunes of insurgencies and terrorism in the Middle East, look to Saudi Arabia's interests. Right now their interest is in loosening the oil flow from Iraq, and therefore they are restricting their support for the insurgency in Iraq to reduce the pressure on world oil prices. It is high oil prices, and not US military success that is buying the current quiet period in Iraq. For their troubles the Saudis are getting a US policy that is neither too hot nor too cold for them: oil is as expensive as it can be without setting of large scale moves away from oil, or large scale moves towards radical energy efficiency.
Saudi Arabia ha been promising the same million barrels of extra production since last year. The game is, they aren't in Saudi Arabia, but in Iraq. It is the containment of Iraqi shipments accomplished by the Sunni insurgency that has helped push oil prices up to this level,. The oil kingdom's task from its point of view is managing supply so that they do not spike above these levels for long enough to shift the US political balance towards technology and conservation and away from apology and consumption.
The high oil prices also mean that Saudi Arabia can afford to internally reduce its funding for Wahabism and other forms of Islamic extremism. The lesson here is that the price for peace with Islam is pretty simple: give them every cent we earn and let them buy up American stocks, real estate and use American military power to continue their hold on power.
The US-China-Arabia triumvirate is, ultimately, unstable. China has an interest in much lower commodity prices, and an interest in shifting the world economy away from oil based energy sources. The United States has different geo-political aspirations than either. However, in the short term, the triangular trade of oil to the US, for dollars, dollars into stocks in return for interest, these dollars drive demand that buys goods from China, and keeps wages down, which the Chinese can then recycle into the US. Current US deficits are, in effect, buying the alliance of Saudi Arabia and China, but it is the best friendship that 2 billion dollars a day in trade deficit can rent.
Summary
The solidity of Bush's political control in the US means that other nations are not going to engage in direct political conflict with the US. However, there is an increasing drive to limit American power and to gradually reduce the centrality of America in international organizations and international financial arrangements. Recent moves show increasing assertiveness from China, the continuation of Saudi policy to bleed the West white slowly, and Europe's commitment to maintaining labor and social standards, as well as a lower inflation environment. However, Europe, particularly, must play for time, and the recent moves made in the run up to the economic summit by Germany, France and other EU nations indicate that this is precisely what they are doing - negotiating over how to share the growth that is available, while making gradual structural changes to increase efficiency, technology and trade freedom, without allowing a race to the bottom. The Franco-German goal is to survive politically while establishing greater European unity. Their problems: slow growth and high unemployment - are going to be met by incremental changes in rules which allow them to deliver enough stimulus to prevent political turmoil, while not substantially increasing inflationary pressures.
Greenspan continues in his effort to engineer a second "soft landing" in the current very slow expansionary cycle in the US. However, the acceptance of higher producer price inflation indicates that while his efforts may be short term successful, the long term sees the stage set for an explosive growth in commodity inflation in the 3 to 5 year time frame. The acceptance of an overheating world economy by the US Federal Reserve, and the willingness of the US to consume the short term benefits of that growth, has not gone unnoticed elsewhere in the world, particularly in Europe, Asia ex-China and, increasingly, in South America. This policy is not likely to change, however, until the next large economic downturn in the business cycle, and then only if the American opposition party decides to become, in fact, an opposition party, and not a centre-right party competing with the right wing Republican governing coalition.
The collision course is still on, even if there has been a move to midasize some of the peripheral issues.