CURRENT AFFAIRS SEPTEMBER 2013
Elections in Germany
The 22 September 2013 election rattled Germany’s political landscape, kicking a bastion of the conservative establishment out of Parliament for the first time since 1949 and catapulting an upstart anti-euro party to national prominence.
Chancellor Angela Merkel kept her post for four more years, with her Christian Democratic Union and its Bavarian sister party drawing a remarkable 41.5% of the vote. But while it cemented Ms. Merkel’s dominance, the election left the rest of German politics in disarray.
The business-oriented Free Democratic Party, Ms. Merkel’s junior partner in her center-right government since 2009, suffered a historic defeat with just 4.8% of the vote. The result put the FDP, a party that served as a junior partner in government for 46 of the last 64 years, below the 5% of the vote needed for seats in Parliament for the first time in German post-war history.
FDP supporters chalked up their collapse in part to the rise of an anti-euro party founded just months ago, the Alternative for Germany, known by its German initials AfD. The party drew about 4.7% of the vote, but better than what was predicted.
The left-of-centre also appeared rudderless. The Social Democrats, the main opposition party, had its second-worst election result in history with just over 25% of the vote and struggled with an uninspiring candidate, former Finance Minister Peer Steinbrück. The environmentalist Greens, who lost ownership of a core issue after Ms. Merkel agreed to wean Germany off of nuclear power in 2011, dropped to 8.4%.
Ms. Merkel’s alacrity in adopting rival policies made it hard for the opposition to attack her. She has often justified her ideological flexibility by saying that the CDU is a big tent, not a narrowly conservative movement.
BRICS to set up a $100 billion fund to steady currency markets
The BRICS emerging economies will set up a $100 billion fund to steady currency markets, but it looks unlikely to be in place soon enough to temper the effects of an expected pullback of US monetary stimulus.
China, holder of the world’s largest foreign exchange reserves, will contribute the bulk of the currency pool.
Cheap dollars that fuelled a boom in Brazil, Russia, India, China and South Africa over the past decade have turned tail since Ben Bernanke, chairman of the Federal Reserve, warned in May 2013 of a ‘taper’ in the US bond-buying scheme.
China has committed $41 billion; Brazil, India and Russia $18 billion each; and South Africa $5 billion.
The emerging nation facing the biggest financial shock, India, received scant sympathy from China and Russia as both called for policy action to tackle external deficits. Nonetheless, Indian officials said they were counting on the strong support of the G20 to provide reassurance over the winding down of the Fed’s quantitative easing programme as the US economy picks up.
US Fed leaves decides to continue with the stimulus
On 18 September 2013, the US Federal Reserve decided to leave its $85 billion a month stimulus programme in place, against broad expectations that it would reduce it as the economy grows. Fed policy makers instead cut their growth forecast for 2013 and 2014, suggesting the economy is feeling the impact of government spending cuts and continues to struggle to break free from the Great Recession.
The Federal Open Market Committee (FOMC) said that although the economy appears to be holding up amid government “sequester” spending cuts, it “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
In addition, it pointed to the impact of a sharp rise in interest rates since May as possibly already slowing the economy.
The FOMC acknowledged that the economy is still expanding “at a moderate pace,” and that labour market conditions — a central focus of current Fed policy — have improved in recent months. However, it noted, the jobless rate at 7.3 per cent in August “remains elevated.”
Fed’s move came against the backdrop of a somewhat gloomier outlook for economic growth from US Fed officials. In a new set of quarterly forecasts, the Fed now sees growth in a 2 per cent to 2.3 per cent range in 2013, down from 2.3 per cent to 2.6 per cent in its June estimates.
The downgrade for 2014 was even sharper: 2.9-3.1 per cent from 3.0-3.5 per cent.
Fed’s decision means the policy of super easy money will continue for a few more months. For emerging economies like India, this is good news. Indian economy is heavily dependent on foreign funds to finance its record current account deficit, which hit a record 4.8 per cent of GDP in the in 2013-13.
Between June and August 2013, India saw the sharpest foreign fund outflow since the global financial crisis in 2008. Investors feared that this exodus would worsen and the rupee would depreciate further. But that is unlikely now.
The Fed’s decision also gave Reserve Bank of India’s new Governor Raghuram Rajan much needed leeway to formulate his maiden monetary policy. A tapering by the US Fed would have forced Dr Rajan’s hands to hike key interest rates to defend the rupee by making India attractive for foreigners.
US-Russia deal on Syria’s chemical weapons
US Secretary of State John Kerry and Russian Foreign Minister Sergey Lavrov reached agreement on 14 September 2013, on a framework for Syria to destroy all of its chemical weapons, and said they would seek a UN Security Council resolution that could authorise sanctions—short of military action—if Syrian President Bashar Assad’s government fails to comply.
The deal calls for international inspectors to be on the ground in Syria by November and to complete their initial work by the end of that month. All of Syria’s chemical weapons stocks, material and equipment would have to be destroyed or removed by mid-2014.
Administration officials had said that President Barack Obama was open to a Security Council resolution that did not include military force as a punishment if Assad doesn’t follow through on promises regarding the weapons. While Russia would be all but certain to veto any measure with such a penalty, Obama’s willingness to concede the point –after threatening a US-led military strike with or without approval by the US Congress—provided a step forward.
Thaw in US-Iran relations
US President Barack Obama and Iranian President Hassan Rouhani spoke on the phone on 27 September 2013, in the first talks between the leaders of the two nations since 1979. The phone call capped a week of breakthroughs in Washington’s estranged relationship with Tehran.
The 15-minute phone call was dominated by discussions on efforts to reach an agreement on Iran’s nuclear programme.
President Obama said he believed both sides can reach a “comprehensive solution” and both leaders instructed their top diplomats to continue pursuing efforts to resolve the nuclear impasse.
On 26 September, in another first in the US-Iran relationship, Secretary of State John F. Kerry had met Iranian Foreign Minister Mohammad Javad Zarif on the sidelines of the United Nations General Assembly session in New York. The two diplomats participated in the P5-plus-one talks and held a brief bilateral meeting.
Rouhani wrote on Twitter that he and Obama had expressed their mutual political will to rapidly resolve the nuclear issue. The Iranian President wants to reach an agreement between three and six months.
Noting that Iran’s Supreme Leader Ayatollah Ali Khamenei has issued a fatwa against the development of nuclear weapons and Rouhani has said Iran would never develop nuclear weapons, Obama said he had made clear that “we respect the right of the Iranian people to access peaceful nuclear energy in the context of Iran meeting its obligations.
Obama said he believed that “there is a basis for a resolution.” He said he had also conveyed to Rouhani his deep respect for the Iranian people.
Rouhani said Ayatollah Khamenei supports his efforts to negotiate. “Whatever result we achieve through negotiations, my government will have the full backing of all the main branches of power in Iran as well as the support of the people of Iran,” he said.
In sharp contrast to his predecessor, Mahmoud Ahmadinejad who referred to the US as the Great Satan, Rouhani described the US as a great nation.
At the G20 Summit, held on 5 September 2013, at St Petersburg, Russia, emerging and developed G20 powers struggled to find common ground over the turmoil unleashed by the prospect of the United States reducing a flood of dollars to the world economy.
The Group of 20, which united in response to global crisis in 2009, now faces a US economy picking up, Europe lagging and developing economies facing blowback from the looming ‘taper’ of the Federal Reserve’s monetary stimulus.
“Our main task is returning the global economy towards steady and balanced growth. This task has unfortunately not been resolved,” Russian President Vladimir Putin told leaders as they met at an annual summit.
Leaders signed off on a jobs and growth initiative, as well as steps to combat international tax evasion and tighten financial regulation. But concerns persisted that renewed market turbulence could hit developing economies hardest.
The summit was overshadowed by great-power tensions over the Syria crisis, with leaders addressing security matters over dinner after their traditional debate on a world economy that is doing slightly better than a year ago.
A Japanese government official said that at Finance Ministers’ talks over dinner, no countries were explicitly critical of the Fed although it was discussed at length.China and Russia said vulnerable countries, including G20 member India, will need to take steps to rebalance their economies, ruling out bailouts for countries that have hit trouble.
Washington, while playing up its contribution to growth, said emerging economies would have to do their homework as it dials back its expansive policy settings.
Advanced economies led by the United States will drive global growth while emerging countries are at risk of slowing due to tighter U.S. monetary policy, the International Monetary Fund warned in a pre-summit briefing paper.
Loose monetary policy must be adjusted step by step without causing economic disruptions, German Chancellor Angela Merkel said on the G20 sidelines.
The high debt burden piled up by industrialised economies has also driven calls from some members of the G20—which accounts for 90 percent of world output and two-thirds of its population—to get borrowing down.
Canadian Prime Minister Stephen Harper, a champion of the debt-reduction agenda, said he would nonetheless seek to balance his budget by 2015 as he seeks to boost investment and growth.
Japanese Prime Minister Shinzo Abe told the G20 that Tokyo aimed to achieve both economic growth and fiscal reforms with his pro-growth policy agenda, but made no mention of a planned doubling of the sales tax over the next two years.
The G20 Declaration: In the five years since we first met, coordinated action by the G20 has been critical to tackling the financial crisis and putting the world economy on a path to recovery. But our work is not yet complete and we agreed that it remains critical for G20 countries to focus all our joint efforts on engineering a durable exit from the longest and most protracted crisis in modern history.
Need of the hour is to: (i) increase the momentum of the global recovery; (ii) generate higher growth and better jobs while strengthening the foundations for long-term growth; (iii) Avoid policies that could cause the recovery to falter or promote growth at other countries’ expense.
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