The Price of Success

Obama just scored a rare, if minor, breakthrough on Middle East peace. Now comes the hard part.

After 20 months, Barack Obama's administration may be close to injecting some much-needed stability into the on-again, off-again Israeli-Palestinian peace process. The deal concluded last week in New York between Secretary of State Hillary Clinton and Prime Minister Benjamin Netanyahu -- if it gets through the Israeli cabinet and the Palestinians -- should allow the negotiations to resume in the wake of a three-month moratorium on settlements. But as I've written before, the administration shouldn't pray for anything it really doesn't want and isn't prepared for. The upcoming challenges will severely test a president and secretary of state who badly need a foreign-policy success.

First, the good news. Any advance in the excruciatingly painful world of Arab-Israeli negotiations is significant. The Obama administration deserves much credit for keeping the Israelis, Palestinians, and key Arab states on board during some very tough times. The U.S. president has seized on this issue and isn't giving up -- a central requirement for success.

The extension of the settlement moratorium will allow the administration to shift focus from settlements (where it had no chance to succeed) to the substance of the negotiations (where it must go if it wants an Israeli-Palestinian agreement). And make no mistake, an agreement on borders and security would be a huge success in the negotiations and restore faith in both the credibility of the negotiating process and in America's diplomatic skills.

That the secretary of state is deeply enmeshed in brokering this deal is also significant. Hopefully, she will invest even more time in the negotiations and correct the bureaucratic anomaly that has characterized the administration's envoy-centric approach. Only the secretary has the power and the time to do heavy lifting -- not just with the Israelis and the Palestinians, but with the president. Over the next three months, Clinton must become the desk officer for the Israeli-Palestinian negotiations, with the president brought in at critical times.

Now, the bad news. Let's skip over the fact that the administration has generously rewarded the Israelis with military hardware and political guarantees for something (settlements) they shouldn't have been doing in the first place, or that the president is paying a steep price just for getting talks started again. We have to hope that there are additional substantive understandings reached that will secure the talks beyond the three-month moratorium.

Beyond these problems, there are additional challenges. First, the administration will be under enormous pressure to broker an agreement on borders and security within three months, or at least make enough progress to ensure that both sides have a stake in continuing. A rapidly ticking clock can be a catalyst if the issues on the table aren't consequential ones; if they are, time can work as an enemy, not an ally. Israelis and Palestinians don't want to be rushed into making mistakes or concessions on core issues. In fact, it is in their interest to drag matters out to show their constituents how tough they've been in the negotiations.

Borders may be easier then refugees, but getting the Israeli government and the Palestinian Authority to agree on the only realistic two-state solution possible -- the June 1967 lines with land swaps and settlement blocs to accommodate Palestinian and Israeli needs -- will be very hard. It may require a new Israeli government more capable of compromise, along with the delays and deals that Israeli domestic politics require. With 32 governments since Israel declared independence in 1948 and the average length of each government about 1.8 years, this is no small matter in a negotiation in which continuity is critical. Then there's the pesky problem of what kind of benefits and goodies the Palestinians will demand to make it easier for them to return to the table.

What's even more troubling is Jerusalem, where the Israeli government will continue to build and expand Jewish neighborhoods, presumably with U.S. acquiescence. Jerusalem is not just an identity issue for both sides, each of which sees the city as its historical capital and spiritual center, but also a territorial one. Can you define the final borders of a Palestinian state without defining the borders of Jerusalem? It's hard to imagine. Even if the Palestinians wanted to finesse the Jerusalem issue, they may have no choice but to push it hard because the Israelis will continue to build there during the negotiations. So, the administration has bought itself a high-wire act early on. If there is a deal breaker, Jerusalem is it.

Having set a high bar early in his administration, there is no doubt the president intended to be the architect of a Palestinian state. He remains outwardly committed, but whether he still feels this way in the wake of the midterm election, a jobless recovery, and myriad other headaches much more important to his re-election than Palestinian statehood is anybody's guess. As he looks for possible foreign-policy successes, he does confront an interesting fact: The Israeli-Palestinian issue is probably the least hopeless challenge he faces in the broader Middle East -- a stunning reminder of the cruel and unforgiving world he now inhabits with Afghanistan, Iran, Iraq, and transnational terrorism all posing serious dangers.

There is no telling now whether Obama and his team will be able to facilitate, let alone deliver, an Israeli-Palestinian agreement. But one thing is unmistakably clear: If the president really wants to be the father of a Palestinian state, he is going to have to throw an unbelievable amount of time, energy, and political capital at the problem. And he is going to have to have a clear strategy for setting up decision points for Israelis and Palestinians along the way. This will require toughness and reassurance -- not just honey, but vinegar too. Obama has already received his Nobel Peace Prize; the time to earn it may be just around the corner.

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The Long Currency War

The G-20 summit failed to solve the international currency war -- and it may soon be escalating.

At the end of the G-20 summit, which limped to its dispiriting conclusion Friday in Seoul, where world leaders managed only to delay dealing with difficult challenges from global imbalances to trade protectionism, South Korean President Lee Myung-bak proclaimed a "temporary end" to the so-called currency wars that have reached a fever pitch over the last two months as countries have manipulated their exchange rates to gain an edge in world markets. The currency wars are far from over.

For years, Washington and Beijing clashed over the value of the renminbi, China's currency, with the U.S. Congress repeatedly threatening tariffs to retaliate against Beijing's currency mercantilism. This policy of containment was not perfect, but it did secure at least token cooperation from the Chinese -- who in 2005 revalued by 2 percent -- while keeping Washington's trade threats from translating into actual barriers.

That was before the collapse of Lehman Brothers and the subsequent financial conflagration that swept the world in the fall of 2008. In the post-crisis world of lackluster global demand, the terrain is harsher. The world economic pie is not growing fast enough, and contests over the slices are increasingly vicious. They are exacerbated by sheer hubris: Emerging powers, especially China, are not satisfied with relative gains, but hunger for absolute ones. Their zero-sum policies threaten the postwar, U.S.-built, win-win, global economic order that propelled the very ascent of backward developing countries into booming emerging markets.

The only plausible means to alleviate the global acrimony is robust and more balanced economic growth. For all the talk of "global decoupling," the fates of countries remain tied to one other, and the fortunes of emerging markets continue fluctuating with demand in the United States, the world's largest importer. Complaints from countries like Brazil, China, and Germany about the U.S. Federal Reserve's "quantitative easing" moves, which by default devalue the dollar, attest to these interdependences.

The U.S. economy is the only white knight in the world economy because consumer-led growth in emerging markets is still distant -- China and India are bound to produce some 500 million new middle-class consumers, but not until 2030 -- while it is unattainable in aging Europe and Japan. The grand paradox of the hour is that while other countries criticize the United States for its fiscal deficits or expansive monetary policies, they would doubtless also bark at American austerity. Berlin and Beijing have taken a convenient shortcut, preaching to Washington while doing precious little to spur global demand and address their own contributions to global imbalances.

Washington is condemned if it does and if it doesn't. The best and most plausible way out for the United States is an ironclad plan for fiscal solvency, tax incentives, and passage of pending trade deals, all of which will instill confidence in American businesses to start investing and hiring. That will take time, however, and patience is in short supply.

Another option to defuse the currency wars would be to address the symptom instead of the cause and change the global currency regime altogether. World Bank President Robert Zoellick backhandedly hinted at the possibility of reviving the gold standard in his recent Financial Times op-ed. But any fundamental change would be a long shot even in the long run. It is also a risky proposition. No other currency enjoys the economic prowess and liquid financial markets that underpin the U.S. dollar. Fixing currencies to gold could also prove destabilizing if any major country failed to maintain domestic monetary and financial stability. The likeliest outcome is a gradual movement to a co-currency world, with a global dollar coupled with a regionally predominant euro in Europe and, down the road, the Chinese renminbi in Asia.

More likely, however, given what just took place in Seoul, the global economic pie will grow too slowly for the appetites of the leading economies, and the global currency system will not change. Tensions are bound to persist as a result.

I see three scenarios for this contentious world of prolonged currency wars:

The first, and unlikeliest, is a détente: a thawing of the icy relations over exchange rates and imbalances and adherence to common rules of the game among the leading economic powers. In this scenario, akin to the world of the 1990s, countries would pass contentious matters over to mediation by the International Monetary Fund or to arbitration at the World Trade Organization, which would then craft common rules to manage global troubles.

The second scenario is containment. In this economic cold war, the main economic powers would hold their fire, yet make it known that if provoked, they would retaliate with tariffs, currency devaluations, and other interventionist tools. International institutions would be deployed selectively, when they served the main powers' interests. This realpolitik world would be stable: The specter of mutual assured destruction would compel cooperation among powers of relatively similar economic size. But this scenario also requires diplomatic savvy by countries to adhere to the implicit rules of the game.

The third scenario is pre-emption: a world where tariffs are erected against anticipated currency devaluations, currencies are devalued to blunt monetary loosening, and monetary policy is deployed as a tool of statecraft. This scenario would be hugely perilous. It would deal a deathblow to international institutions and central bank independence, indelibly foreclose the détente option, and bring about a global economic disorder whose hallmarks would be mercurial financial markets, widening global imbalances, spreading state capitalism, and beggar-thy-neighbor protectionism.

Which scenario will prevail in the months ahead? Only the United States has the ability to steer the world in a productive direction. Rising powers have yet to match their nascent economic prowess with a sense of responsibility for the world economy. As the G-20 meeting so painfully illustrated, there are no alternative leaders on the horizon, just as there are no substitutes for the American world economic order anchored in rules-based institutions and good economic governance. The stakes of the moment are far greater than one country or another's quest for a competitive advantage in world trade. The United States must uphold its order, and only it can. Or we will be worrying about a lot more than just disappointing summits.

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