Alistair Darlings Back from the Brink is not just a compulsive read: it is an essential primer for

anyone with aspirations to be Prime Minister or Chancellor. Its not unlike the manual in The Hitchhikers
Guide to the Galaxy with Dont Panic emblazoned on the front.
The glory of this book is that, unlike Mandelsons bitch fest of self-congratulation, malice and
poison towards anyone who was not in total awe of The Presence, Darling comes out of it all as an
unlikely hero. There is not the dull scrape, as there is in most political memoirs, of a large case being
dragged across the floor where a trumpet is lovingly removed and blown at every opportunity.
It has been far too easy for reviewers just to concentrate on the purple passages and forget about
the central problems of the Blair and Brown eras, their mutual and self- destructive hatred, the collapse
of cabinet government, the sidelining of officials, making policies on the hoof and a total lack of
understanding of the grave that the banks were digging.
Blair, through sheer charm of personality just about got away with it. Brown, locked himself away
in his own personal Gormenghast, surrounded by trembling courtiers and his own private mafia of
enforcers, his eyes flicking from face to face, seeing betrayals, conspiracies and bizarre plots in the
guttering candlelight. By contrast, King Lear seemed to be a well grounded barrel-load of laughs.
When Darling entered the Treasury as Chancellor he noted the gloom of the place, where
Gordon Brown would rely on his own advisors rather than officials.
'My arrival as chancellor heralded something of a culture change in the Treasury, especially for
the senior officials. During his ten year tenure, Gordon had tended to deal with them through his special
advisors, principally Ed Balls and Ed Miliband. He worked on the strategy; his advisors made sure the
detail fitted the strategy. Unlike other departments I had worked in, where officials were used to working
with the Secretary of State directly, many senior Treasury officials had never actually sat down with the
Chancellor himself.' A "bitch fest" refers to an unproductive meeting of people where complaints are
aired; a show, performance.
EN 2 Charlie McCreevy, the European Unions single market commissioner, on Tuesday
defended his decision to forge ahead with watered down plans to liberalise EU services by arguing that a
more radical attempt to create a free market in the sector was never ever going to become a piece of
legislation.
Mr McCreevy on Tuesday got a resounding backing from members of the European Parliament
for a new draft services bill that incorporated most of the amendments demanded by MEPs earlier this
year. Coupled with the broad support from EU leaders last month, this means an accord could be
reached before Austria ends its six-month presidency of the EU in June.
Martin Bartenstein, the Austrian economics minister, welcomed Mr McCreevys latest plans,
saying that the chances of reaching agreement under the Austrian presidency had improved
considerably and significantly.
Echoing the commissioner, Mr Bartenstein argued that we need pragmatic solutions rather than
presenting proposals which never come to an end. Mr McCreevy will now present his draft bill to EU
ministers at a meeting in Graz at the end of this month.
The services legislation has weakened or removed many of the more controversial aspects of the
original legislation tabled by Mr McCreevys predecessor, Frits Bolkestein, including the country of
origin principle, which would have guaranteed that companies could apply their domestic labour law
when providing services abroad. That prospect sparked widespread concerns among western European
trade unions about lower wages and an influx of workers from the former Communist bloc, and was one
of the factors that led French and Dutch voters to reject last year the planned EU constitution.
Mr McCreevy said on Tuesday that the EU urgently needed to do something about services and
could not have prolonged a divisive debate over Mr Bolkesteins more radical ideas, which would have
remained fruitless. It was going to stay up on the shelf, where we could continue to admire it from afar,
he said.
Still, some MEPs warned that vaguer legislation could pave the way for more court challenges,
while others recognised that services providers might struggle to understand the benefits of such
legislation. Malcolm Harbour, one of the MEPs who has led the services discussion, said: We must win
the hearts and minds of people who think we have produced a diluted piece of legislation. I can assure
you that it isnt.
But the widely perceived watering down of the law has also threatened to trigger a backlash from
east European countries that want further market opening because, as low-cost countries, they stand to
benefit most from fiercer price competition among services providers.
1

Partly to offset their frustration over the weakened services directive, Brussels on Tuesday
presented new legal guidance on a separate piece of legislation designed to guarantee that posted
employees, such as construction workers, can work abroad on limited contracts.
Vladimir Spidla, the EUs social affairs commissioner, said he would step up monitoring of
whether governments, particularly in western Europe, had erected bureaucratic hurdles to prevent the
arrival of such temporary workers, and said he would consider legal action should Brussels have
evidence of specific breaches of the EU legislation.
The kind of unfair red tape that Brussels wants to avoid includes long notification periods required
by some governments before allowing workers to enter their country on a limited contract, as well as
excessive documentation. Mr Spidla said: It is possible for documentation to be required but only really
the necessary documentation
N 1 Is it possible for France and Germany to reform despite the words new certification as
both terrifying and a vote-loser and stop what is seen in some places as their decline as poles of
allegiance and emulation in Europe?
The presumptive answer is mostly yes, say the countries most aggressive heralds of decline,
depending on the price in comfort the two societies and their politicians are willing to pay.
But as Jacques Chirac acknowledged last week (he could have been speaking for Germany too),
a national undertaking that requires leaving a cosy, risk-averse, statist couch for a more open, more
competitive, more growth-orientated world is a very awkward business.
In Chiracs case, this statement followed a sharp defeat in regional elections that was mostly a
protest vote against his governments tentative jabs at reducing the enormous cost of the French public
sectors overhead. The president was asked on television how he could unhook the concept of reform
from the peoples belief that it really meant sacrificing the benefits they liked the most. By using the
word less, he said.
Jrgen Peters, the head of the German metal workers union, said at a rally over the weekend in
Cologne, Were fed up with so-called reforms that we pay for and serve other peoples interests.
In his view, the Chancellors reform policies really come down to smaller unemployment
payments, more money spent on the dentist, higher cost for medicine, and cuts in pensions.
On parallel rails, political will and reality on each side of the Rhine meet here. If the French and
German reform efforts persist, however faint compared with the temblors of the Thatcher or Reagan
scales of societal change, they point in the direction of more difficulties at the polls and perhaps in the
streets for Chiracs neo-Gaullists and Schrders Social Democrats, who face 13 elections in Germanys
regions in the coming months.
That almost certainly means either watering down, slowing or masking any reform process. And
this at a time when the EU has singled out both France and Germany for failing to put into effect the
economic modernisation directives (followed by the letter by Spain and Portugal) that are supposed to
return Europe to global competitiveness.
Chastened by the elections, Chirac has told the nation that a mix of planned potions for change
will be diluted. But the presidents swerve was hardly precedent-setting: already last August, following a
few days of anti-reform strikes, the government announced that it was abandoning a plan to cut 30,000
jobs in 2004 from a public sector that represents 44% of overall state expenditure.
In Germany, where some taxes have been lowered and some suppleness brought to the labour
market (but without a spurt of economic growth), speculation is now ablossom that jagged-edge reform
measures are over and done. The r-word, it is said, should be used by the government only in
connection with feel-good areas like research, vocational training and innovation. The line among Social
Democrats is that if the Legislature in the federations biggest state, North Rhine-Westphalia, falls in
2005 after 39 years with an SPD hand on power, Schrder goes, too.
All this is far, very far, from the kind of grand, bold politics and dramatic change that is being
demanded by the German and French critics who describe their countries as being locked in decline.
This week, the fastest-rising book on the main German nonfiction best-seller list is called, in
rough translation: Germany, the decline of a superstar.
Ed Miliband tries to detoxify his brand
The scrubbing job starts in earnest this morning, as Ed Miliband tries to erase that "Red" epithet
from before his name. Exhibit A was his appearance on the Andrew Marr show, in which he took every
opportunity to cast the manner of his victory in a favourable light. "If you look at this as one vote-one
member, then I got more votes than anyone else," he assured us, before going on to say that he won the
2

union vote because, "I spoke about things that matter to working people in this country." When asked
whether he would sway under pressure from the union leadership, he averred, "I'm nobody's man, I'm
my own man and I'm very, very clear about that." And as a final flourish, "I'm certainly not Bob Crow's
man."
As for the actual substance of the interview, Miliband struck an ambiguous tone. On the allimportant deficit, he would only say that the Alistair Darling plan was a "starting point". But, then, he did
go on to say he "will not oppose every government cut," and he even made an admission that is rare
from a Labour figure: "Some public sector workers would have lost their jobs under us, yes." So as to
whether he will be veering towards or away from fiscal insanity, there is no clear answer yet. He did
make some noises about increasing the taxes on the banks, but that's hardly surprising nor necessarily
unpopular. The question is whether he can continue to be so vague in coming months. The Tories will
certainly make an issue of it if he is.
Then, universal benefits. This was a subject that MiliE injected into the Westminster bloodstream
before the election, and I've said before that it could be among the most significant dividing lines of this
Parliament. His position, of course, is that benefits should remain universal, that they should stretch to
the middle classes and he reiterated that point here. "Means-testing has real problems," he told Marr,
"it misses out the people in the middle." Ah, yes, the people in the middle. Miliband also makes an
appeal to them in an article for this morning's Sunday Telegraph that rattles on about "aspiration" and the
"squeezed middle". Expect him to return to this theme again and again.
Ed's Very Big Week
Fairness demands one acknowledge this has been Ed Miliband's best week since he became
Labour leader. James's piece in this week's edition of the magazine explains why in typically fine
fashion. He concludes:
Theres undoubtedly something different about Miliband now: more swagger, more conviction.
His adept handling of this crisis and his successful parliamentary gamble have shaken the confidence of
the Tories. Being the first party leader to take on Murdoch and threaten to win is no mean feat. But can
he keep it up? He wonders if this current drama will turn out to be just a couple of weeks when the world
looks like it has turned upside down and then the world goes back to normal and everybody is like, what
was all that fuss about?
Indeed. Given that the public had a low opinion of journalists anyway, much of this affair serves to
confirm their existing prejudices. (Next: estate agents are spivs! Who knew?) In theory, as James says,
Miliband should benefit from a first-mover advantage in this game but while the press and political
classes are obsessed by Murdochiana it's not evident the general public are similarly preoccupied.
Nevertheless, Miliband looks a bigger man now than he did last week. One can see how this
could be the beginnig of a new story for him. The trouble, however, is that the most obvious "narrative" to
be built from this is a kind of Shrumian populism that it's difficult to see Miliband quite being able to carry
off. "The people vs the powerful" hasn't often worked for the left in recent decades (Ted Kennedy,
Kinnock, Gore and Kerry all tried it) but in a post-financial crisis era and with the eurozone in danger of
imminent meltdown one can sketch an outline of a refreshed, perhaps more plausible, version of that
familiar tune.
Meanwhile, I've a quick piece up at Foreign Policy guessing at what yesterday's events may
mean.
BBC unwittingly led the Gordon Brown coup plotters to break cover
Three days of spiralling intrigue began with a claim that the revolt against Gordon Browns
leadership was all but over
As Labour Party chiefs surveyed the wreckage of the most traumatic 72 hours since Gordon
Brown became leader, one man was being singled out for triggering the attempted coup.
The individual in question is a wily political operator with impeccable connections at the highest
level of the Labour Party and a plausible excuse for talking to any plotter.
Little did Nick Robinson, the BBCs Political Editor, realise when he sat in front of the microphone
on Friday morning that his declaration that the threat to the Prime Minister was receding could have the
opposite effect.
By the end of the day, Westminster had learnt that eight MPs had written to Ray Collins, Labours
General Secretary, demanding a vote on Mr Browns future at the conference.
3

Among those who publicly defied the Prime Minister was Siobhain McDonagh, a Blairite assistant
whip who was immediately stripped of her job the start of the latest crisis for Mr Brown. The following
day Joan Ryan was sacked from her role as the Prime Ministers Special Representative for Cyprus. The
coup was under way.
Mystery still surrounds how the names of the rebels who submitted their requests for leadership
nomination papers a fortnight ago became public.
Frank Field blamed Downing Street yesterday, claiming that the rebels letters had been leaked
by the leadership in a bid to smash their nascent campaign. Mr Brown certainly benefited from the way
the news trickled out on a Friday, a day when the media were preoccupied with the collapse of the travel
company XL.
But both Downing Street and Geoff Hoon, the Chief Whip, deny that they were involved. Mr Hoon
said that he had no idea Ms McDonagh was involved until Friday afternoon.
Most intriguingly, some officials believe that the media were tipped off by one of the plotters, who
was furious at the suggestion by Robinson on the Today programme that the threat to Mr Brown had
disappeared.
US Republican leaders have unveiled a new policy document - The Pledge to America - ahead of
mid-term elections. It is receiving mixed reviews online. Pundits on the left abhor it, while those on the
right tend to think it is a good first step, but wish it had gone further.
Washington Post scribe and policy wonk Ezra Klein applauded the idea of political parties
proffering such policy documents, but gave the substance of the GOP pledge a scathing review:
"When you get past the adjectives and soaring language, the talk of inalienable rights and
constitutional guarantees, you're left with a set of hard promises that will increase the deficit by trillions of
dollars, take healthcare insurance away from tens of millions of people, create a level of policy
uncertainty businesses have never previously known, and suck demand out of an economy that's
already got too little of it... This proposal avoids the hard choices of governance. It says what it thinks will
be popular and then proposes what it thinks will be popular - even when the two conflict. That's an idea
that may help you win elections, but not one that'll help you govern a country."
Over at Think Progress, left-leaning blogger and author Matt Yglesias railed against the spending
priorities expressed in the document.
"Perhaps the most telling thing about where the modern conservative movement is now,
however, is their pledge on spending which says that "with common-sense exceptions for seniors,
veterans, and our troops we will roll back government spending to pre-stimulus, pre-bailout levels." Of
course once you except Social Security, Medicare, and defense from cuts you're talking about not
touching the government's three largest programs... it's a plan that says we'll cut spending on children,
the poor, and the next generation's infrastructure in order to ensure that taxes can be cut on the rich
while protecting our own base constituencies - old people, defense contractors, veterans - from the
scythe."
The editors of conservative magazine National Review offered the document a full-throated
endorsement.

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Legal Liability Looms under New Lobbying Bill
Scene: a CFO suddenly learns that she must personally sign off on her company's compliance
with a certain law. If what she certifies isn't true, she could go to jail or pay a whopping fine. So she
insists that the company install an elaborate procedureat great costto make sure that what she signs
is fully supported by the facts.
Those circumstances will sound familiar to any finance chief who has worked at a publicly traded
company for the last five years, since they clearly apply to the Sarbanes-Oxley Act's certification
provisions. Unfortunately for many CFOs, however, they're likely also to apply to another area of
corporate life as early as this week: political lobbying.
Indeed, in the highly likely event that the President signs the Honest Leadership and Open
Government Act, the new lobbying bill passed overwhelmingly by Congress earlier this summer, many
senior executives will find themselves certifying the facts about the gifts their employers give to
politicians. The executives would also be assuming scads of new criminal liability along the way. The bill
would amend the Lobbying Disclosure Act of 1995, which contains the Senate rules governing gifts to
senators and staff members, as well providing criminal penalties for lobbying infractions by former
government employees.
Among much else, the new law would wipe out the current LDA exception that permits members
of Congress and staffers to accept gifts worth under $50. More importantly from a corporate-reporting
perspective, executives of companies that register under the LDA must attest twice a year that the
companies haven't violated Congressional gift rules.
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Eurozone borrowing unscathed by credit crisis

Eurozone borrowing by business was growing at the end of last year at the fastest rate since the
launch of the euro, according to European Central Bank figures on Monday that indicate the global credit
squeeze has so far had scant impact.
Lending to non-financial corporations accelerated to an annual growth rate of 14.4 per cent in
December, up from 14 per cent in November and the highest since the euro was introduced in 1999.
The latest data point to robust economic activity across the 15-country eurozone, where many
businesses have felt little or no impact from the financial market turmoil or the repercussions of the US
subprime mortgage crisis.
They appeared to contradict the ECBs survey of bank lending conditions earlier this month,
which pointed to a significant tightening last year. One explanation is that lending standards had
tightened only slightly and from levels that were exceptionally lax.
The ECB may take some comfort from a deceleration in M3, the broad money supply measure it
watches as an inflation early-warning signals. M3 growth fell from an annual rate of 12.3 per cent in
November to 11.5 per cent in December.
But Elga Bartsch of Morgan Stanley argued that it would be difficult for the ECB to change its
view on eurozone inflation risks ahead of its interest rate-setting meeting on February 7, after which it
could again hint at possible interest rate increases. Still, downward revisions to growth forecasts and
fears about financial stability should eventually induce the bank to step way from its long-held tightening
bias, Ms Bartsch added.
UK defence plan hits finance snag
The turmoil in credit markets has dealt a big blow to the UK governments defence procurement
programme, putting in jeopardy plans to help fund a new fleet of Airbus tankers for the Royal Air Force
with a bond issue.
The 13bn project over 27 years, the largest private finance initiative, is now expected to be
financed by bank debt.
The government and a consortium led by EADS, the aerospace and defence group, had been
planning to raise 2.5bn in the City through a combination of bank debt and a bond issue. These bonds
were expected to be supported by guarantees provided by troubled bond insurer Ambac.
However, Ambac and other bonds insurers have been hit hard by losses on bonds they have
insured. The credit rating of Ambac was cut below AAA by Fitch Ratings and further downgrades are
thought likely, sharply reducing the value of their guarantees.
For the past 10 years, PFI deals have been using bond insurers to support their bonds when
raising initial capital for the projects. The insurers give their triple-A creditworthiness to the bond, making
them cheaper to sell and so cheaper for the government to raise money.
But as the credit turmoil has spread, the spreads on monoline-wrapped bonds have shot up as
the market worries about the ability of the insurers to stand behind their commitments.
The investment banks didnt think they could place any Ambac paper in todays markets
efficiently, said somebody close to the deal.
The other monolines the government was considering working with including triple-A rated
MBIA were similarly struck by a collapse in market confidence.
Although other monolines have not been as hard hit, there is scepticism generally around the
monoline market, said Anthony Forshaw, managing director at Deutsche Bank, the consortiums
financial adviser.
Instead, the government and the AirTanker consortium are likely to revert to their earlier plan to
finance the deal solely through bank debt. They had sought to raise some money through bonds after
the banks demanded a high rate of interest during the summer credit-crunch.
Last night, Phill Blundell, the chief executive of the AirTanker consortium, said: It is fair to say a
more bank-driven solution is now likely. We still expect to achieve the affordability targets we agreed with
the government.
7

HBOS will lead the group of banks lending the money. Lloyds TSB are also involved, and the
consortium expects to get the deal away by the end of March.
The shift could be the death-knell for the monolines involvement with PFI, because unless the
markets confidence in them returns, their wraps will be virtually worthless. Unless the cost of capital
arbitrage returns . . . its going to be very difficult for the monolines to recover market share, Mr Forshaw
said.
monoline bond insurer - A Triple-A-rated company that guarantees that all interest and principal
payments on a bond will be paid as scheduled and that participates in no other line of insurance
business. Monoline-a business that focuses on operating in one specific financial area. death knell a
sign that something will soon fail or stop existing [death blow]
Child Benefit Cut Unenforceable, Treasury in a Flap
The government is struggling to find a way of making George Osbornes plans to remove child
benefit from those paying 40% tax work.
A Treasury source says the policy is unenforceable and likely to be ditched before its scheduled
introduction in 2013. Another source at the heart of government says the expectation is that it will
eventually not happen. Elsewhere I hear that it is panic stations in the Treasury.
At root is a problem that should have been apparent to those designing the policy, if detailed
advice had been sought from civil servants before it was announced at Conservative party conference.
Child benefit is generally paid to the mother. She is under no legal obligation to tell the father that
she receives it. The Treasury confirms this. It is her benefit. The fathers tax status is irrelevant. If a
mother claims it there is nothing forcing her to flag up to the taxman that her husband earns above the
level that Osborne stipulates should mean no child benefit.
Indeed, the child benefit was designed with the express purpose of keeping the cash away from
men. Remember the argument of Barbara Castle and others when its precursor was introduced. It went
direct to the mother in order that the father wouldnt spend the proceeds on drink or gambling.
In the U.K. tax system households are not taxed, individuals are. The Treasury acknowledges
that is the basis on which the system of personal taxation works. Potentially, this problem rather stuffs a
flagship coalition policy, or makes it prohibitively expensive and complicated to implement.
How can the government easily prove the connection between mothers who pay no tax or earn
less than 44,000 and the higher rate taxpayer she might live with? And then keep tabs on the situation
on a monthly basis for almost two decades with millions of taxpayers involved (moving in and out of
work, having new children, some separating, getting divorced, finding new partners who may or may not
be higher rate taxpayers, etc).
Its easier to stop the mother getting the benefit if she herself is a higher rate taxpayer. It could be
done via her tax code. But if shes not, how good will the government be at establishing whether she is
living with a partner paying tax at 40%?
A mother fills out the form for Child Benefit when her child is born, and then the money is paid
until her offspring hits 19. If it wants to proceed, the government will have to scrap that simple universal
system of payment and try to construct a mechanism that keeps track of what millions of mothers
partners are earning.
This is what is causing Thick of It style panic in the Treasury and HMRC. I hear that ministers
are considering (and tell me which part of the rest of this sentence might provide cause for concern) a
new government database to try and match up mothers with their partners.
In theory it would enable cross-checking of the child benefit claims of mothers with the national
insurance numbers, tax codes and addresses of fathers/husbands/partners. What could possibly go
wrong? The governments record with new databases is not great.
I sought guidance from the Treasury. They directed me to HMRC. Then HMRC said that this was
the Treasurys business. Asked about a potential new database, a Treasury spokesman responded:
HMRC will need to check applications (for Child Benefit). They are considering the most effective
method of doing so.
I am told that an honesty box is also being considered on male self-assessment tax forms, so
that fathers earning more than 44,000 can confess that the mother of their children is taking child
benefit.
But again, the mother is under no legal obligation to tell the father. The father can simply say he
doesnt know and that his wife/partner wont tell him. Is there a way round this? Not easily. Does the
8

coalition have plans to legislate to force husbands, wives and partners to know each others finances
inside out and tell the truth about them at all times. If so, good luck with that.
Latin Americas history of debt crises might imply that governments in the region should reduce
their debts to zero. But a new report suggests that this is not just unachievable, it is undesirable.
There is still a strong case for governments to have debt, the report from the Inter-American
Development Bank argues. They can use it to redistribute income from presumably wealthier future
generations to those alive now, fund development projects, and finance policies aimed at smoothing the
effect of business cycles and financial shocks.
Governments should control debt issuance by creating a fiscal policy framework that ensures that
debt stays within sustainable levels. They should manage the inherited stock of debt, in part by using a
combination of debt instruments.
Most striking of all, the study, Living with Debt: How to Limit the Risks of Sovereign Finance,
argues that policymakers and international financial institutions should help create new instruments that
could help reduce the regions vulnerability to crises.
Governments could lower default risk by issuing bonds with equity-like features, the report says.
These would provide for lower payments in the event of financial shocks such as natural disasters,
recessions and commodity price busts.
Introducing into debt contracts contingencies with equity-like features which allow for more
efficient sharing of the potential volatility would make them safer for investors and allow governments
to better manage their fiscal policy over the business cycle.
These would be instruments that offer lower payoffs during bad times and higher payoffs during
good times, the IADB says.
Interest payments could be indexed to commodity prices, the terms of trade, or the rate of growth
of gross domestic product. For example, when commodity prices drop or growth rates slow, the burden
of debt servicing on the government will decline, as investors will share part of that debt-servicing burden
with the government.
This would, in turn, reduce the volatility of a countrys debt-to-GDP ratio widely used as an
indicator of debt sustainability and in effect reduce the probability of a debt crisis.
There has been a limited use of bonds contingent on a countrys economic circumstances. For
instance, Argentina has made use of the so-called GDP-linked warrant, designed to pay more if growth
is faster than expected, as part of the massive restructuring of its debt last year.
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Renminbi at heart of trade imbalances

The Americans get the toys, the Chinese get the Treasuries and we get screwed. Thus a
European Union official once characterised the pattern of Beijing accumulating US assets by selling
renminbis for dollars, while nothing stood in the way of a rapid and destabilising appreciation of the euro.
It was this routine that led to the US running a huge current account deficit with counterpart
surpluses in much of east Asia (including China) and parts of Europe, and among the oil exporters of the
Middle East. A shift in exchange rates is almost certainly a necessary part of rebalancing the world
economy, shifting the burden of consumption towards those surplus areas a task that Ben Bernanke,
Federal Reserve chairman, recently called extraordinarily urgent.
But as yet, there is little sign of either China or most east Asian countries (except Japan) allowing
their currencies to appreciate substantially. And the recent experience of other emerging markets is likely
to make them yet more reluctant.
In east Asia there has been a bit of appreciation against the dollar which helps at the margin, but
the elephant in the room is the renminbi, says Mark Williams, international economist at the consultancy
Capital Economics.
A string of countries including Thailand, Malaysia and South Korea have intervened either
verbally or in the foreign exchange markets in recent weeks to slow the rise of their currencies.
Mr Williams suspects that the Chinese currency, which was repegged against the dollar in July
last year after being allowed to drift upwards for a few years, will not be permitted to resume appreciating
against the greenback before the middle of next year.
Gerard Lyons, chief economist at Standard Chartered bank, says: To help rebalancing, we really
need currency flexibility in the two big surplus areas the Middle East and east Asia. But that is likely to
come later rather than sooner.
Mr Lyons says that in previous economic cycles, there appeared to be a strong correlation
between exports and business confidence in east Asia, leaving policymakers reluctant to put exports at a
competitive disadvantage by allowing currency appreciation.
Rebalancing the global economy was never going to be done by Christmas, and nor is it a simple
question of domestic demand shifting from the US to China. As the International Monetary Fund pointed
out in its most recent world economic outlook, Chinas consumption is equal to only about a quarter of
total consumption in the US and in those European countries with large current account deficits.
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