Obama policies to benefit from feelgood factor

WORLD VIEW: THE “BAD boyfriend break” gives the next one a short but definite advantage in any relationship with a woman who…

WORLD VIEW:THE "BAD boyfriend break" gives the next one a short but definite advantage in any relationship with a woman who has gone through that experience. All he has to do is to act with normal civility to gain appreciation and sympathy from his new partner, writes Paul Gillespie

This image of Barack Obama’s initial six months in power helps us understand one of the main opening benefits he will enjoy around the world. Even if the changes he makes are more stylistic than substantive, more to do with process and consultation than policy outputs, and even when he makes the screw-ups inevitable in any opening presidency, the fact that he is not George Bush and is good at public diplomacy will smooth the way towards a friendlier relationship with allies and adversaries alike.

So argued Daniel Drezner, professor of international politics at Tufts University, a prolific author and blogger on the subject (see foreignpolicy.com) at a UCD policy round table organised by its Clinton and European institutes this week.

This should not obscure Obama’s overwhelming immediate priority – fixing the domestic economic crisis. That directly involves tackling world macroeconomic imbalances, including with Europe and China. He will be no pushover even if he is a good listener, since he is committed to defending and promoting US interests.

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Another speaker, Séamus Ó Cléireacháin, a Galwegian teaching international economics in New York state university and Columbia University, underlined just how pressing the economic crisis facing Obama is. The latest indicators show exports “falling off a cliff”, monetary policy maxed out, the federal deficit at -8 per cent even before the $800 billion stimulus package passed this week, a large and widening gap between investments and savings and industrial production figures in precipitate decline.

There is now a $2 trillion funding requirement for the US budget. This will have profound implications for global capital markets as the US sucks in world savings and ruthlessly competes for them. That may drive up effective interest rates for other borrowers – including small ones like Ireland. And as Chinese growth slows, its exports decline because of falling world demand and it uses its surpluses to fund itself, there may not be as many spare savings around to suck in.

Ó Cléireacháin was not too alarmed by incoming treasury secretary Timothy Geithner’s written testimony that China is manipulating its currency to protect its exports, since Geithner knows China very well and is fully aware it is now the largest holder of US debt – but the new administration will have to decide whether to cite China for unfair policies in its report to Congress.

That, along with buy American clauses in the stimulus package, risks a protectionist trade war.

If it does cite China, will the administration try to bring the Europeans along in a more aggressive approach? That would be a source of tension, on top of its likely impatience with the slower pace of decision-making in the EU. The US economy is now more open, but a new Doha world trade round may be a step too far for Obama.

All this highlights Chinese premier Wen Jiabao’s critical remarks at the Davos economic forum: “Inappropriate macroeconomic policies of some economies and their unsustainable model of development, characterised by prolonged low savings and high consumption; excessive expansion of financial institutions in blind pursuit of profit . . . and the failure of financial supervision and regulation to keep up with financial innovations, which allowed the risks of financial derivatives to build and spread”.

This is a measured judgment with which many Europeans would agree. The Chinese want to maintain their exchange rate, exports and external holdings and ensure world macroeconomic arrangements protect them in the medium to long term. That gives them an interest in avoiding a trade war if possible by responding to such US pressure.

But it could also allow them to switch holdings from dollar to the euro. And they will want to speed up the current institutional switch from the Group of Eight industrialised states to the largest and more representative G20.

Such constraints on Obama’s foreign policy are a salutary study in realism. Another speaker at the round table, Scott Lucas, professor of American studies at Birmingham university (see his website, Enduring America) underlined the policy tensions and strategic choices facing the new administration. It must decide whether to engage Iran, negotiate with Hamas, when to pull out of Iraq, how intensively to fight the Taliban and al-Qaeda in Afghanistan and Pakistan, whether to abandon missile defence in Europe, and how best to deal with the EU and Nato. In each case, Obama’s pragmatism will be tempered by expertise, but tested by disagreements about these hard cases.

Dan Mulhall, director general of the Department of Foreign Affairs, and Rory Montgomery, its political director, outlined some of the equivalent constraints on the EU side of the transatlantic relationship. The relationship is asymmetrical, Mulhall emphasised, in that the EU is not a state and cannot act in the same unitary way as the US.

But the changing relationship deepens the argument for a more coherent EU external policy. Montgomery wondered whether existing international institutions such as the UN, Nato and the EU will be fit for the purpose of this shift.

Marek Grela, the Polish director of transatlantic relations at the council in Brussels, cheered the gathering by praising Ireland’s remarkable progress since the 1990s and the “cultural flexibility” he thinks can see us through these bad times.