America the Absent

Why is the U.S. afraid to lead the global economic recovery?

The release of another weak U.S. jobs report this Friday, July 6 -- which showed the economy adding only 80,000 jobs in June and the unemployment rate holding steady at 8.2 percent -- raises some serious red flags. It's just one of many signs these days that the world economy is once again on the brink of an abyss. Nearly four years after the collapse of Lehman Brothers, U.S. growth is flailing, central banks are racing to cut interest rates, and several European nations have plunged back into recession. Instead of powering the 21st-century world economy, export-dependent emerging markets remain hostage to the transatlantic economic morass. We should be out of this by now. The missing ingredient? U.S. leadership.

In the 20th century, beginning with the creation of the Bretton Woods system in 1944, America's great contribution was to champion an economic paradigm and set of institutions that promoted open markets and economic stability around the world. The successive Groups of Five, Seven, and Eight, first formed in the early 1970s, helped coordinate macroeconomic policies among the world's leading economies and combat global financial imbalances that burdened U.S. trade politics. The International Monetary Fund (IMF) spread the Washington Consensus across Asia and Latin America, and shepherded economies in transition toward capitalism. Eight multilateral trade rounds brought down barriers to global commerce, culminating in the establishment of the World Trade Organization (WTO) in 1995.

Meanwhile, a wave of bank deregulation and financial liberalization began in the United States and proliferated around the world, making credit more available and affordable while propelling consumption and entrepreneurship the world over. The U.S. dollar, the world's venerable reserve currency, economized global transactions and fueled international trade. Central bank independence spread from Washington to the world and helped usher in the Great Moderation, which has produced a quarter-century of low and steady inflation around the world.

Globalization was not wished into being: It was the U.S.-led order that generated prosperity unimaginable only a few decades ago. Since 1980, global GDP has quadrupled, world trade has grown more than sixfold, the stock of foreign direct investment has shot up by 20 times, and portfolio capital flows have surged to almost $200 trillion annually, roughly four times the size of the global economy. Economic reforms and global economic integration helped vibrant emerging markets emerge: The "Asian Tigers" (Hong Kong, Singapore, South Korea, and Taiwan) that boomed in the 1980s were joined in the 1990s by the awakening giants of Brazil, China, and India.

It was the United States that quarterbacked the play, brokering differences among nations and providing the right mix of global public goods: a universal reserve currency, an open-trade regime, deep financial markets, and vigorous economic growth. Trade liberalization alone paid off handsomely, adding $1 trillion annually to the postwar U.S. economy.

Talk about American decline notwithstanding, the economic order created by the United States persists. In fact, at first blush, it appears to have only been reinforced in the past few years. New institutions such as the G-20, a forum for the world's leading economies, and the Financial Stability Board, a watchdog for the international financial system, are but sequels to U.S.-created entities: the Group of Five and the Financial Stability Forum. Investors still view America as a financial safe haven, and the dollar remains the world's lead currency. Open markets have survived, and 1930s-style protectionism has not materialized. The WTO continues to resolve trade disputes and recently welcomed Russia as its 154th member, while the mission and resources of the Bretton Woods twins -- the World Bank and IMF -- have only expanded. No country has pulled out of these institutions; instead, emerging nations such as China and India are demanding greater power at the table. Countries have opted in, not out, of the American-led order, reflecting a reality of global governance: There are no rival orders that can yet match this one's promise of mutual economic gains.

Still, while the American order is peerless, it is also imperiled. The deepening European debt crisis, discord over national policies to restore growth, and the all-but-dead Doha Development Round of WTO negotiations speak to the failures of the global economy's existing instruments to manage 21st-century challenges. Instead of coordinating policies, leading countries are trapped in a prisoner's dilemma, elbowing for an edge in world trade and jockeying for power on the world stage. Tensions simmer over issues such as exchange-rate manipulation, capital controls, creeping protectionism, and financial nationalism.

Right at the moment when we most need to shore up the troubled global economic order, America -- the architect of this very order -- is failing to lead. Even as the United States remains pivotal to global growth, U.S. corporations -- the engines of the American economy -- are stifled by taxes, regulations, and policy uncertainty. Gaping fiscal deficits in the United States are undermining the dollar, exacerbating trade deficits, and undercutting U.S. economic dynamism and credibility in world affairs, but political posturing has obstructed the country's path to solvency. Earlier this week, the IMF warned that if political deadlock takes America to the so-called fiscal cliff of automatic tax hikes and spending cuts in January 2013, it could have a devastating impact on the U.S. and world economies. No wonder America's image as the global economic superpower is receding around the world.

Europe's travails, meanwhile, are reducing U.S. companies' exports and overseas profits, threatening America's recovery. And yet Congress has balked at boosting the IMF's resources to fight the eurozone crisis while the Obama administration has deflected responsibility, framing the crisis as Europe's to manage. It has fallen to countries such as Brazil, China, India, Mexico, and Russia to instead build the firewall that will shield the rest of the world from Europe.

The welcome momentum in negotiations between the United States and Pacific Rim countries on the Trans-Pacific Partnership free trade agreement does not undo over three years of drift in U.S. trade policy that has jeopardized the very global trading system that the United States built and powered in the postwar era. The only trade deals that the Obama administration has passed -- with Colombia, Panama, and South Korea -- were launched and negotiated by the Bush administration.

The world is now facing a triple threat of global economic instability, divisions among top powers, and a global leadership vacuum. This perfect storm could produce a world disorder of mercurial financial markets, widening global imbalances, spreading state capitalism, and beggar-thy-neighbor protectionism -- a scenario with a sorry past and few safe exits.

In the late 1940s, a new world order arose because of American strength, vision, and leadership, not because global governance was in vogue. Leadership was never easy: Resistance from allies, protectionist pressures at home, and resource-draining wars all stood in the way. But capitalism spread, trade and financial markets were liberalized, and emerging-market crises were defeated. Global economic integration forged ahead.

Today, American leadership is again essential. China prioritizes mercantilism over multilateralism, and emerging nations have yet to fully step up to the plate when it comes to global governance, while Europe and Japan are neither able nor willing to lead. In placing their faith in multilateralism, liberal institutionalists often fail to realize that the world economic order is built on American primacy and power, and Washington's willingness to project it.

To lead abroad, the United States must reform at home by imposing ironclad fiscal discipline, cutting taxes and red tape for businesses, and locking in long-term policies -- summoning the private sector to reform schools and rebuild infrastructure, for instance -- that harness the productivity of America's future generations.

Abroad, the United States needs to focus on pre-empting instability and integrating the global economy. It should push the IMF to address financial risks before they mushroom into catastrophes, revise the multilateral trade regime to allow for fast deals among a critical mass of members rather than agonizing, decade-long talks requiring the consent of the full membership, and work toward unfettered global financial markets -- all the while deepening access to U.S. goods, services, and investment around the world. A Trans-Pacific Partnership agreement and a transatlantic free trade pact are low-hanging fruits that can jump-start global growth without any new stimulus dollars.

The quintessential challenge facing U.S. policymakers is to convince other nations to buy into a rules-based order rather than respond to the siren calls of currency wars and capital controls. For example, with most emerging economies uneasy about Beijing's trade and foreign policies, Washington must incentivize others to take the high ground and strengthen investor protections, enforce intellectual property rights, and adhere to trade rules. With others playing by the rules of the game, a misbehaving China would be turned into a pariah.

A stable, integrated, and growing world economy serves our national interests. But such a world is America's to make.

Justin Sullivan/Getty Images


Sarkozy's Houdini Act

Is France's embittered former president trying to hide from prosecution or quietly laying the groundwork for a big comeback?

PARIS – When Nicolas Sarkozy was battling his way toward the presidency in 2007, he often seemed like the Energizer Bunny of French politics: frenetic, relentless, and troublingly ubiquitous. Like that deranged, effervescent, pink rabbit, he broke through barriers and intruded into the darnedest places.

Long before he took office in the Élysée Palace, he had manufactured an image based on tough talk and hard-charging actions that could fill kiosks full of newsweekly covers and thus inspire the relentless dedication of legions of newspaper correspondents. (When he was a government minister under President Jacques Chirac, he would actually brag about his impact on magazine sales and television ratings.) The Sarko Show devolved into a national soap opera: His wife was his chief of staff, then left him for another man, but came back in time for his election to the presidency. Soon after, he gave France its first presidential divorce, speed-wooed former supermodel Carla Bruni, and provided the country with a rare presidential wedding and, better yet, its first presidential birth. In the end, it was hard to tell whether they were France's Camelot, with Bruni as Jackie Kennedy, or its political Brangelina. Sarkozy's jumpy voice seemed to play in a loop for years, accompanying people's café and croissants over the morning radio, or barging in on family dinners during prime-time news broadcasts.

The country was so overwhelmed by his omnipresence (the media actually dubbed him the "omni-president") that it began to suffer from what might be called Sarkozia -- a mental disorder defined by the fraught disorientation of spending so much time around a politician who relishes destabilizing others.

And then, in little more than the time that it took for the electorate to reject him in May, Sarkozy was gone. The man who drove the French media insane for much of the last decade has tried to disappear like Houdini.

In the less than two months since the end of his presidency, France's most notorious media-hound has gone silent. There have been no formal speeches and no comments on Europe's tenuous economic situation (even as his former government has been blamed for a wide array of related problems). He has spent much of his time vacationing overseas, first in Morocco and more recently in Quebec. France hasn't been entirely Sarko-free, but close. He made a silent and stately appearance at a memorial ceremony for four French soldiers who were killed in Afghanistan. His replacement, François Hollande, invited Sarkozy, partly out of respect but perhaps also to highlight who is really responsible for the unpopular war. But it was Hollande who gave the eulogy, as Sarkozy watched like a respectful scarecrow in the breeze. Or a ghost.

Is the notoriously competitive, insecure, and neurotic Frenchman feeling sorry for himself after failing to win reelection? Undoubtedly. Is the disappearing act a premeditated strategy? The answer to that question came when his 25-year-old son, Jean, visited the presidential palace in the waning days of his father's presidency -- just prior to Hollande's inauguration -- to seek his father's benediction. Jean Sarkozy planned to run for a conservative seat in Parliament in June.

Sarkozy père, ever the political calculator, nixed the idea of his son carrying the family's political torch forward. "Bad idea," Nicolas told Jean, according to a brief report of the encounter published in the French daily Le Parisien. "The Sarkozys must make themselves forgotten, and they will make themselves forgotten."

The former president wants to send a Nixonian message: France no longer has Nicolas Sarkozy to kick around anymore. The subtext: Perhaps absence will make the heart grow fonder.

An object of as much public fascination as Sarkozy is can never completely escape the limelight, though. Paparazzi crews have repeatedly tracked the former president down on his regular jogs. For years, he harvested such moments for their dynamic communications impact. But on one recent occasion, which was broadcast on French television, the dejected former president asked his media stalkers if they ever planned to leave him alone.

Plenty of French people would be glad to oblige. Much of the country just wants to move on from the Sarkozy years, but if the Energizer Bunny presidency is over, the French can be forgiven for feeling like that rascal rabbit has left an improbably long trail of fecal pellets behind him. That sense has been growing since his presidential immunity from prosecution lapsed on June 16, a month after he left the presidential palace. French courts have a notable tradition of engaging in lengthy legal pursuit of former presidents in corruption cases, including Sarkozy's predecessor, Chirac, who was found guilty of corruption in December of last year.

Sarkozy's new chief antagonist may be Judge Jean-Michel Gentil, who is in the midst of a multiyear investigation that started out looking into whether people around the aging billionaire heiress Liliane Bettencourt, of the L'Oréal empire, manipulated the dementia-stricken octogenarian for their own financial gain and to buy political influence from Sarkozy's political party. Charges have already been filed against 11 people, including Bettencourt's former money manager, who spent 88 days in preliminary detention as the investigating judge sought to figure out what he did with a total of about $7 million of the old lady's money.

In an offshoot of that investigation, Gentil, backed by police investigators, carried out a series of raids on Tuesday, July 3, on Sarkozy's office, the home owned by Carla Bruni-Sarkozy where the couple live in the posh 16th arrondissement, and a law firm in which Sarkozy is a partner.

The judge is particularly focused on what was done with $1 million that was withdrawn from Bettencourt's Swiss bank accounts on two separate occasions. The initial withdrawal came on February 5, 2007, days before Bettencourt's money manager met with Éric Woerth, then the treasurer of Sarkozy's first presidential campaign. Bettencourt's former accountant (who is not the same person as her money manager) has told investigators that she gave $185,000 to Woerth. (Political donations in France are limited to $5,660 per person during campaigns.) The second withdrawal came days into the brief two-week runoff campaign later that year. Woerth, who went on to become Sarkozy's minister of budget, and then of labor, resigned as the burgeoning scandal targeted him. He insists that he was the victim of a politicized witch-hunt whose real target was President Sarkozy. (His case is ongoing.)

Several of Bettencourt's former employees have also asserted that Sarkozy quietly dropped by the billionaire's mansion in person on at least two occasions, in February and in April of 2007, to pick up cash.

Days after moving out of the presidential palace in May, citizen Sarkozy's attorney sent the former president's scheduling journal to the judge to show that he only made a brief "courtesy call" to Bettencourt on Feb. 24, 2007. The lawyer insists that the booklet proved that Sarkozy could not have been present on the specific days mentioned by Bettencourt's former employees -- as though a politician would naturally leave a paper trail in his datebook if he was clearly breaking finance law during a political campaign.

An array of other court cases is moving forward that could eventually trip up the former Energizer Bunny. One investigation aims to figure out who ordered French intelligence services to spy on journalist Gérard Davet, at the respected daily Le Monde, in an attempt to ascertain who his sources were in 2010 on a particularly sensitive story. Davet was writing about the Bettencourt saga and her entourage's alleged interactions with Woerth (then a prominent minister under Sarkozy). Le Monde obtained copies of letters written from spy-service figures loyal to President Sarkozy, to Davet's cell-phone provider, in order to obtain the reporter's call records.

A more complex, and sinister, case involves an investigation into a complex kickbacks scheme, known as the Karachi Affair, that may have helped fund the presidential candidacy of Édouard Balladur, Sarkozy's political mentor, in the mid-1990s.

Yet another case is moving forward on Sarkozy's own initiation. He is suing the French investigative website Mediapart over its publication during the recent presidential campaign of a document suggesting that Libyan leader Muammar al-Qaddafi agreed to provide $62.5 million to Sarkozy's successful 2007 presidential campaign. Sarkozy's lawyers argue that the document, provided by a former Libyan diplomat, is obviously false and that Mediapart knew as much.

Beyond the many court cases, plenty of politicians -- on the new ruling left and on the opposition right -- have a clear interest in highlighting Sarkozy's leadership failings. The current French government, which has promised to hack $50 billion from France's budget deficit over the next two years, suggests that the Energizer President sapped the country's coffers with tax cuts for well-connected corporations and his rich supporters (like Bettencourt) at the very moment when France should have been leveling out the amount of its long-term debt.

Conservatives back their standard-bearer's tax policies -- and they highlight three decades of overspending by governments on both sides of the political aisle -- but Sarkozy's defeat and disappearance have left a political leadership chasm that various prominent political figures are jockeying to fill ahead of a party congress in the fall. There are fears of political divisions -- or even a split -- that could leave his UMP party weak, divided, and largely irrelevant since the left controls all areas of government.

Should that scenario play out, Sarkozy, ever the tactician, knows the party might need a rejuvenated white knight who could ride in, once again, as the hero. Indeed, it seems he might not be disappearing so much as playing a waiting game. He is only 57, after all, and he remains a voracious political animal of nearly limitless ambition. He also knows that if the Socialists raise taxes and cut spending as much as they have promised, they will be far less popular in five years than they were on the day that Hollande defeated him at the ballot box.

If this pathway to a political restoration seems stunningly improbable today, it is worth remembering that Sarkozy has pulled plenty of surprising rabbits out of a hat in the past to resurrect himself. But the real trick this time may involve finding that damned bunny amid all of the merde.