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SPEX Issue 28

SPEX Issue 28

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In this issue, we examine EU’s receiving of the Nobel Prize, examine the dilemma of the Indian Central Bank and weigh the policies of the recently elected US president, Barack Obama
In this issue, we examine EU’s receiving of the Nobel Prize, examine the dilemma of the Indian Central Bank and weigh the policies of the recently elected US president, Barack Obama

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Published by: SMU Political-Economics Exchange (SPEX) on Nov 11, 2012
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 INCOLLABORATIONWITHPROUDLYSUPPORTED BY
ISSUE 2812 NOVEMBER 2012
- The Nobel Peace Prize for 2012- Dilemma of the Indian Central Bank - Obama Reelected: Good or Bad? You decide.
The Fortnight In Brief (30
th
October to 12
th
November)US:
Improved Economic Data Amidst Obama’s Re
-election
With President Barack Obama winning the second term on 6 Nov, the focus nowhas shifted to the imminent fiscal cliff. The Democrats increased their majority inthe senate while the Republicans retained their control of the house of representatives. The election came with a backdrop of improved economic data,with the ISM manufacturing index increasing from 51.5 in September to 51.7 inOctober and the private sector adding 163,000 jobs in October. The report on jobcreation was above expectations, with gains becoming more broad-based,indicating a labour market in healing mode.
 Asia Pacific ex-
Japan: Upbeat Economic Data to Welcome China’s New
Leadership
Currencies throughout Asia rose with Barack Obama’s
reelection, with the Taiwan
dollar advancing 0.5% and the Thailand baht, South Korea’s won and Philippine’s
peso all gaining 0.3%. The rise indicates the view that Obama is likely to continueincreasing dollar supply which can be invested in Asia. Meanwhile in China,exports in October grew its fastest since May, with overseas shipments increasing11.6% compared to a 10% estimate. Retail sales, a measure of consumptionspending saw a 14.5% rise, up 0.3% from September. This points to a potentialrebound of the China economy and the avoidance of a hard landing. The upbeat economic data comes at a time where China transits to a new leadership.
EU: Healthcare Reform Test for New Dutch Government 
The recently sworn in dutch coalition government is showing strains ashealthcare reform drives a wedge between the liberal and labour parties. Mark Rutte, the liberal prime minister, negotiated a coalition agreement with the labourparty which will introduce progressive insurance premiums. This has riled manyof his party members and supporters alike, driving some to call him "Marx Rutte".An income tax cut at the top end from 52% to 49% is expected to compensate thehigher income group but the cap on premiums means that top income earnerscome out ahead while the upper middle class gets squeezed. Prime Minister Rutteseeks to clear up this fiasco and renegotiate a deal with labour, but the staunchlabour party is unlikely to budge on the agreement. This untimely setback couldthrow a monkey wrench to the plans to initiate tough reforms amidst theEuropean debt crisis.
 
SMU Political-EconomicExchange
AN SMU ECONOMICS INTELLIGENCE CLUB PRODUCTION
 
 
 © Copyright 2012 SMU Economics Intelligence Club
 
2
The Nobel Peace Prize for 2012
By Henry Chan, Singapore Management University
The Norwegian Nobel Committee has decided that the Nobel Peace Prize for 2012 is to be awarded tothe European Union (EU). The union and its forerunners have, for over six decades, contributed to theadvancement of peace and reconciliation, democracy and human rights in Europe.In the inter-war years, the Norwegian Nobel Committee made several awards to persons who wereseeking reconciliation between Germany and France. Since 1945, that reconciliation has become areality. The dreadful suffering in World War II demonstrated the need for a new Europe. Over aseventy-year period, Germany and France has fought three wars. Today, war between Germany andFrance is unthinkable. This shows how, through well-aimed efforts and by building up mutualconfidence, historical enemies can become close partners.In the 1980s, Greece, Spain and Portugal joined the EU. The introduction of democracy was a conditionfor their membership. The fall of the Berlin Wall made EU membership possible for several Central andEastern European countries, thereby opening a new era in European history. The division betweenEast and West has, to a large extent, been brought to an end; democracy has been strengthened; manyethnically-based national conflicts have been settled.The admission of Croatia as a member next year, the opening of membership negotiations withMontenegro, and the granting of candidate status to Serbia all strengthen the process of reconciliationin the Balkans. In the past decade, the possibility of EU membership for Turkey has also advanceddemocracy and human rights in that country.The EU is currently undergoing grave economic difficulties and considerable social unrest. TheNorwegian Nobel Committee wishes to focus on what it sees as the EU's most important result: thesuccessful struggle for peace and reconciliation and for democracy and human rights. The stabilizingpart played by the EU has helped to transform most of Europe from a continent of war to a continent of peace.The work of the EU represents "fraternity between nations", and amounts to a form of the "peacecongresses" to which Alfred Nobel refers as criteria for the Peace Prize in his 1895 will.Oslo, 12 October 2012The passage above is the press release of the Norwegian Nobel Committee on the award of the 2012Nobel Peace Prize to the EU. It comes at a most surprising moment when the EU's very existence hasbeen called into question following the four year old debt crisis. The Peace Prize was not awarded
during the EU’s heyday –
the time when many people thought it was a viable alternative to US in worldleadership during the post-cold war era and when the euro was shaping up to be a feasible substituteto the US dollar as the dominant world reserve currency. Instead, it is given at the lowest ebb of EU inits history. Nobel committee's intention is clearly to remind EU citizens that the union's most important aim is to transform Europe from a continent of war to a continent of peace, and EU's successshould not be measured based on simple economic terms of dollars and cents alone. Taking the peacedividend into account, Europe today remains a success and the EU is still a viable institution.Probably not everyone will buy the line of reasoning of the Nobel committee, however, the prize hasgreatly strengthened the emotional resolve of many pan Europe believers. The peace prize has thepotential to influence future projects the EU and its leaders must undertake to implement thedecisions of the June 29 EU summit on integrated financial framework, integrated budgetaryframework1, integrated economic framework and enhanced pan European political institutionlegitimacy. German Chancellor Merkel already declared that the prize would inspire her to pressahead with closer integration.
 
 
 © Copyright 2012 SMU Economics Intelligence Club
 
3
Euphoria generated in the expansion of EU and birth of the euro in the early part of last decade werethe reasons behind the sudden disappearance of financial and fiscal prudence in that era. Theimprudence deepened the pre-existing structural defects of the EU peripheral countries currentlyembroiled in the crisis. The financial collapse of 2008 exposed the deep structural problems of thosecountries and brought the uncontrollable debt spiral forward in 2009.The unexpected 2008 crisis divided the EU into rich North and poor South. The North blames theSouth for not living up to the budget cut commitments while the South blames the North for actingimperialistically and imposing unreasonable hardship on its poor Southern cousins. However, settingaside politically weak leadership in Greece, which had spent three years from 2009 to early 2012 inessential inaction and just started to embark on serious structural reform lately, other EU countriessuch as Ireland and Portugal have made reasonable progress to achieve meaningful recovery goingforward. Although many observers have questioned the progress the EU has made in the past 4 yearsto resolve its crisis, an objective assessment will show that there was indeed some sort of progress.The Southern European debt crisis is a classic current account deficit2 problem. A look at the graphbelow prepared by Deutsche Bank shows that dramatic progress was achieved in the last 2 years andthe Southern European countries can return to a sustainable current account situation in two years, if proper support is given to them. In the absence of the typical IMF massive devaluation3 type of current account adjustment, the EU peripheral countries have adjusted their current account muchfaster than conventional wisdom dictates.
Figure 1: Current Account Balances in Peripheral Countries
The market has raised the bar for the euro and EU to survive as the fierce attack on the euro andEuropean Banks in the second half of 2011 and first half of 2012 have shown. The stability of theEuropean financial market and euro in the second half of 2012 is a testament that the EU has slowlyconvinced the market that it still stands a chance to succeed. The EU had proceeded on the path of aBanking Union and definite progress on integrated budgetary
framework and economic policyframework were made. The EU North has demonstrated a new found understanding of the dilemma of theSouth by extending Greek budgetary compliance and allowing the ECB to help Spain work out its fundingproblem on its own time frame. The Nobel Peace Prize is indeed a timely reminder to the EU citizens that thefundamental aim of the union is not just in economic terms, it is also meant to build a peaceful Europe. To doso, citizens must sacrifice for it. The implicit message that the peace dividend should be counted as part of the restructuring cost will be very helpful to get the political leadership moving in the right direction.
The EU as a whole still runs a current account surplus and the total member state countries’ debt toGDP ratio is comparatively better than many of its peers. The market’s fear of a euro zone breakup wasincited more by the failure of the EU’s political le
adership than its economic fundamentals. If a deeperfiscal and political union can be put in place, not only will Europe consolidate itself as a zone of peace

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