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+The End of the Russia-China Debate Ten years ago , comparing the reform 
processes in China and Russia was an intellectual fashion . Was it preferable 
to start with economics – try and get rich , quick , but don’t rock the 
boat politically – in the manner of the Chinese ? Or was it better to start 
with politics – recover liberty and prosperity may follow – which seemed to 
be Russia’s path under Mikhail Gorbachev and Boris Yeltsin ? Today , a new 
comparative debate has started . This time the subject is no longer Russia 
versus China , because Russia has long ceased to be a point of comparison . 
Instead , the new comparative debate involves Asia’s two new economic , 
demographic , and political giants , China and India . China’s annual 
economic growth has been roughly 8-9 % for the last 26 years ; India has 
recorded similar rates for the last decade . In the “ flat world ” of 
globalization – to borrow Thomas Friedman’s powerful metaphor – it seems 
that Russia n
 o longer has a place . Of course , Russia is still the second-largest nuclear 
power in the world , and , as one of the world’s leading exporters of oil and 
gas , it benefits from today’s high energy prices . But Russia’s population 
is disappearing before our eyes . With average male life expectancy just 57 
years , the country is losing close to 800,000 people annually . Indeed , 
Russia is more a fragile oil-producing state than a modernizing economic giant 
. To put it bluntly , Russia is no longer in the same category as China . 
Whereas the “ Middle Kingdom ” is proudly regaining its former global 
status after centuries of decline , Russia is defiantly trying to resurrect its 
former imperial status , but in a manner that appears doomed to fail . Russia 
has clearly taken giant steps in the wrong direction , at a time when China has 
taken steps , however small , in the right direction . When you meet today’s 
“ new Russian Nomenklatura , ” you experience a sudden feelin
 g of being 20 years younger , awash as they are in nostalgia for Cold War 
posturing . By contrast , seen from afar , in their new suits , you might think 
that Chinese economic elites are Japanese . Where Russia represents a return to 
the past , one sees in China an opening , however ambiguous , to the future . 
Of course , some bias is involved here . As a European , I and people like me 
almost instinctively expect more from Russia . It is , after all , a European 
nation in cultural , if not political terms , whereas progress in China will 
not be measured by the introduction of Western-style democracy , but eventually 
, one hopes , by Singapore-style rule of law . The diverse paths followed by 
Russia and China may be explained in part by how the two peoples perceive 
themselves . The Chinese are comforted in their self-image by the world’s 
combination of admiration for their dynamism , greed for the market they 
constitute , and apprehension for the competition they represent . Russi
 ans , by contrast , seem to be animated by a dark form of narcissism . They do 
not find anything to be proud of in the eyes of others . They are respected for 
what they control – the Soviet legacy of nuclear arms and “ Christian 
energy resources , ” to quote Vladimir Putin’s bizarre remark on his first 
official trip to Paris – but not for their economic performance or their 
essence . China and Russia tend to relate to their respective pasts and futures 
in very different ways – with self-confidence in China’s case , with 
self-diffidence in the case of Russia . Chinese elites are convinced that time 
is working in their favor , and that it is only natural that China should 
regain its rank amongst the world leading powers , perhaps even emerging on top 
one day . Indeed , their serene patience stands in stark contrast to the 
anxious reticence of Russian leaders , who have yet to surmount the humiliation 
that Russia suffered as a result of the Soviet Union’s disintegration
  at the end of the Cold War . Russia may be experiencing a global “ 
restoration ” phase , but in politics and economics , and also with respect 
to its empire , restoration is headed in the wrong direction . With Putin’s 
current clampdown on civil society , re-nationalization of key segments of the 
economy , failure to develop any political approach to resolving the conflict 
in Chechnya , and cultivation of imperial nostalgia , Russia is killing its 
only chance to matter in the future . Yet there is no reason for China to 
declare victory . The gap between the respective qualities of China’s 
economic and scientific elites , on the one hand , and its ruling political 
elites , on the other , is simply too monumental – and still growing – for 
stability to be taken for granted . One senses in China the birth pangs of 
civil society , making the introduction of the rule of law increasingly urgent 
. Without political reforms , China’s confidence in herself will quickly turn 
int
 o disillusion , or even delusion . If that happens , the Russia-China debate 
might be revived , this time as a comparison of competitive decadence . 
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+The Making of China’s Trade Deficit BEIJING – China registered a monthly 
trade deficit of $7.2 billion in March 2010 , its first since April 2004. And 
yet , at around the same time , the United States Congress issued its loudest 
call ever to classify China as an exchange-rate manipulator , accusing Chinese 
leaders of maintaining the renminbi’s peg to the dollar in order to guarantee 
a permanent bilateral trade surplus . China’s March trade deficit indicates , 
first of all , that it is incorrect to claim that Chinese economic growth 
depends mainly on exports . Exports are an important part of the Chinese 
economy , and any global market fluctuation or external shock will certainly 
have an impact on overall growth . But , like any other large economy , 
China’s economy is driven by domestic consumption and investment . Indeed , 
China’s exports fell by 16 % year on year in 2009 , owing to the global 
financial crisis and recession . Nevertheless , annual GDP grew by 8.7 % , th
 anks to 16.9 % growth in consumption ( measured by gross sale of consumer 
goods ) and a 33.3 % surge in fixed-investment demand . Moreover , although 
China’s “ trade dependency ” is now reckoned to be 70 % of GDP , that 
figure is greatly distorted by the fact that Chinese exports require massive 
imports of materials and parts . The net value added of total Chinese foreign 
trade accounts for only about 15 % of GDP . Thus , net exports contributed 10.8 
% to China’s overall GDP growth rate , or only about 1.1 percentage point of 
9 % growth in 2008. Compare that figure to Germany , where net exports 
accounted for 64 % of growth in 2008. Similarly , the figure was 33 % in Japan 
, 28.6 % in Korea , and 20 % in the Philippines . Clearly , China is nothing 
special in this regard . To be sure , China’s domestic consumption is not as 
high as it should be , standing at 49 % of GDP in 2008 , with household 
consumption accounting for only 35 % . Such figures have led many observers to 
 believe that overall domestic demand must be low , leaving China dependent on 
external markets for growth . But domestic demand , which determines imports , 
consists not only of consumption , but also of fixed-asset investment . Indeed 
, rapid growth in investment may translate into high import growth and trade 
deficits . That is exactly what is happening in China now . Some people may 
argue that investment growth without consumption growth will result in 
overcapacity and eventually lead to recession . Perhaps . But we need to remind 
ourselves that housing investment accounts for about 30 % of China’s total 
fixed investment , with much of the rest directed toward infrastructure – 
that is , long-term , durable public infrastructure investments – including 
subways , railways , highways , urban public facilities , and the national 
water system . Moreover , one can easily imagine that import demand would soar 
further if the US and the European Union lifted their bans on exports of
  high-tech products to China . In that case , the trade deficit recorded in 
March could be at least 40 % higher . The renminbi’s exchange rate , then , 
is really a secondary factor in China’s external account . Put another way , 
the global imbalance could be corrected more efficiently by addressing other , 
more fundamental factors . The fundamental factors underlying the US external 
imbalance are large fiscal deficits and low household savings , owing to 
excessive financial leverage . The fundamental factors on the Chinese side are 
high corporate and household savings , together with some distortion of 
resource/utility prices . Indeed , the current situation indicates that a 
significant adjustment in exchange rates may not be needed at all in order to 
redress global imbalances . If that is true , and China shouldn’t worry about 
the renminbi’s exchange rate , should it worry about its economy overheating 
? After all , its previous trade deficits in the era of reform – such 
 as in 1992-1996 and 2003-2004 – all occurred at times of overheating . But 
there are differences between now and those earlier periods . For example , 
when rapid investment growth in 2004 led to overheating , world markets were 
booming . At that time , both domestic investment and exports required 
immediate tightening . Today , by contrast , although domestic investment is 
growing very strongly , external demand has not recovered to its previous 
levels . The result is the March trade deficit , caused mainly by exceptionally 
high annual import growth ( 65 % ) coupled with relatively low export growth , 
which reached a nominally impressive 24 % only because of the sharp decline 
recorded in the base period . Such a single-factor situation is easier to deal 
with than the double-factor situation of 2004 , and because the high investment 
demand has been mainly stimulus-related this time , policymakers can handle it 
in a more timely fashion if they perceive a problem . That said , the ra
 tio of capital formation does require careful monitoring . The last time China 
saw such high growth in domestic investment , the savings rate was not as high 
as it is now . The problem currently is that a trade deficit has emerged at a 
time when the national saving rate is as high as 51 % . That means that 
investment is extremely high – and that , despite the high share of 
infrastructure investment , there is an urgent need to manage the potential 
risks . 
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+The Return of Franco-German Leadership PARIS – Whoever wins September’s 
parliamentary election in Germany , the time has come once again for a major 
Franco-German initiative . Regardless of their economic conditions or their 
confidence – or lack of it – in each other , France and Germany are more 
than ever jointly responsible for the future , if not the very survival , of 
the European project . Are there alternatives to Franco-German leadership of 
the European Union ? Joining Great Britain with them in a Club of Three would 
be a good idea , but it is out of the question nowadays . Britain has largely 
excluded itself from any leadership role in Europe . Gordon Brown is barely 
surviving as prime minister , and the Conservatives , whose return to power in 
the next year is almost certain , are as provincially euro-skeptic as ever , if 
not more so . Europe simply cannot count on the British , at least for a while 
. The idea of a Club of Six , floated by Nicolas Sarkozy early in h
 is presidency , was always abstract and is now untenable . Given Silvio 
Berlusconi’s sexcapades , the Italy that he leads cannot be taken seriously , 
while Spain is out of the running for an EU leadership role , owing to its dire 
economic conditions . As for Poland , although the bumbling Kaczynski “ twins 
” have been removed from power , the country’s fixation on security in its 
immediate neighborhood is incompatible with true European leadership . Since 
the other 21 EU members never liked the idea of a Club of Six to begin with , 
it is just as well that such a vision has been buried , probably forever . So 
where but France and Germany can Europe turn for leadership ? A positive 
referendum result on the Lisbon Treaty in Ireland in October would be a 
necessary but insufficient condition to jump-start an institutional re-launch 
of the EU . Above all , the EU needs political will and direction . Only 
Germany and France , acting together , can convey to Europe’s citizens and 
 to the world the sense that the EU is at long last waking up to today’s 
global realities . Of course , it is impossible to underestimate the 
combination of suspicion , tension , and exasperation that characterizes 
Franco-German relations lately . To a large extent , Germany has become a “ 
second France ” in Europe , at a time when France is more French than ever . 
And they are not only putting their respective nationalisms first . They 
disagree on fundamentals – most of all , about how to surmount the economic 
crisis . But the two giants of Europe can agree to disagree about the virtues 
of German-style budgetary rigor or French-style fiscal stimulus as long as they 
don’t insult each other , and , more importantly , as long as they compensate 
for their philosophical differences with a well publicized program of joint 
initiatives on key subjects . As long as each remains convinced that no 
alternative to cooperation exists within the EU , and that European cooperation 
remains
  a priority for both , it should not be overly difficult to restore their 
leadership . After all , France and Germany are closer to each other on many 
key topics than they have been for a long time . With the return of France to 
NATO’s integrated military structure , the two countries are on the same “ 
Atlantic ” wavelength for the first time since 1966. Despite both sides ’ 
deep reservations about the mission in Afghanistan , they are clearly in the 
same boat , even if French troops , being closer to British troops in terms of 
combat , are more vulnerable than the Germans . And both countries would 
probably subscribe to the following formulation : “ Turkey’s future is with 
Europe , but not necessarily in the European Union , at least in the 
foreseeable future . ” The fundamental question about how to deal with Russia 
remains a divisive issue , however . France and Germany have different 
sensitivities on the subject , which is both natural and inevitable , as these 
dif
 ferences reflect both geography and history . Germany is not only much closer 
physically to Russia ; it is also much more dependent on Russia in terms of 
energy security . France must not delude itself : Germany is not about to 
convert to nuclear energy to reduce its reliance on Russian oil and gas . Yet 
Germany also must realize that Russia’s negative evolution has consequences 
that Germans cannot escape . A spectacular Franco-German security initiative 
following the election in Germany , accompanied by a joint message to the 
Kremlin , would also have the benefit of sending a message to the rest of the 
EU , particularly to its Václav Klauses : “ If you decide to paralyze the 
Union through stubborn ill will , you will only end up excluding yourselves , 
rather than dictating Europe’s fate . ” France and Germany cannot move 
Europe alone , but Europe without them cannot move at all . 
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+The Transatlantic Index How should we assess the state of transatlantic 
relations nowadays ? With a nod to Wall Street , we can say that the Alliance 
is up , Europe is flat , and the United States is clearly down . The Alliance 
is “ up ” for one key reason : the warming of France’s relations with the 
US following Nicolas Sarkozy’s election as French president . For the first 
time since Charles de Gaulle established the Fifth Republic , France’s 
priority is no longer to live in opposition to the US . The signs of this shift 
are profound , even spectacular . From a toughening of France’s position on 
Iran to a real warming of relations with Israel , not to mention symbolic 
gestures like Sarkozy’s summer vacation in America , or Foreign Minister 
Bernard Kouchner’s arrival in Baghdad , this is a New France , one seriously 
considering a return to NATO’s integrated military structure . France’s 
shift is the result of both political calculus and deeply felt emotion . For
  Sarkozy , the French are not anti-Americans , but simply anti-Bush . In his 
willingness to break with the past – in particular with Jacques Chirac’s 
legacy – and in adding a global spin to his “ mandate for change , ” 
Sarkozy is paving the way for the post-Bush America that will soon be here . He 
knows that the “ return of France ” as an influential actor in Europe 
presupposes a France that is closer to America , which will automatically bring 
France closer to Germany and Great-Britain , not to mention Poland and Italy . 
Emotionally , too , “ Sarkozy the American , Sarkozy the doer , ” who wants 
to be judged by his actions , tends to see himself as a Gallic incarnation of 
the American dream . He is the son of immigrants , the outsider whose rise to 
the top is living proof of French openness . In the US , too , the attitude 
towards the alliance with Europe has changed mightily . The failure in Iraq , 
the risk of an “ Iraqization ” of Afghanistan , and Russia’
 s newfound assertiveness have moved America from the arrogant indifference 
that characterized most of Bush’s presidency to a rediscovery of the 
Alliance’s value . America needs allies , and is not preoccupied by their 
potential independent strength . As one top American diplomat put it , “ The 
last worry I have when I wake up at three in the morning is that Europe is 
becoming too strong . ” But rapprochement between France and the US should 
not hide other realities . First , in Afghanistan , NATO is in danger of 
suffering its first military defeat . Where will the new troops that are needed 
come from ? And a key member of the Alliance , Turkey , may be about to embark 
in a dangerous military adventure in Kurdish northern Iraq . Second , one 
cannot speak of NATO without noting that the Alliance’s twin pillars – 
Europe and the US – are not in great shape . If Europe is “ flat , ” one 
reason is Sarkozy . He may be encouraging news for the Alliance , his European 
polic
 y is a source of worry for Europe . While Sarkozy claims that Europe is his 
priority , his methods seem to contradict his intentions . The difficult 
personal chemistry he has with German Chancellor Angela Merkel is reinforced by 
his constant attacks on the European Central Bank and its president , 
Jean-Claude Trichet . One cannot simultaneously defend the Alliance in the name 
of Europe and weaken Europe with fits of populism and economic nationalism . 
Europe’s three key new leaders – Britain’s Gordon Brown , Merkel , and 
Sarkozy – all belong to a generation that is no longer emotionally moved by 
the project of European integration . Their links with Europe – if they exist 
at all – are at best rational , not emotional . But will cool rationality be 
enough to create a European security pillar within the context of the Alliance 
? As for America , it is “ down ” in terms of both “ soft ” ideological 
power and “ hard ” military power . The US remains by far the wo
 rld’s strongest country , particularly in military terms , but it is 
confronted with fundamental questions about the use and utility of force at a 
time when power is relative . Today , Americans and Europeans alike must 
demonstrate modesty . Unlike when the Alliance was created , a multi-polar 
world system has taken shape , in which the West’s demographic and economic 
share has fallen , and in which it must now compete with successful 
authoritarian models such as China or even Russia . In this new context , 
solidarity is as crucial as ever . Opinion about the US remains largely 
negative in Europe , and will remain so at least until the US presidential 
election in 2008. Likewise , US perceptions of France and of Europe are only 
slowly improving . It is only by respecting our common values and not 
exacerbating our differences that the West will be able to reinvent itself . 
The Alliance may be “ up , ” but its outlook remains uncertain . 
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+Will Russia Save the West ? MOSCOW – Rapid changes in the global economy and 
international politics are raising , once more , an eternal issue in Russia : 
the country’s relations with Europe , and with the Euro-Atlantic region as a 
whole . Of course , Russia partly belongs to this region . Yet it cannot and 
does not want to join the West wholeheartedly – at least not yet . Meanwhile 
, this choice looks very different now compared to just a few years ago . It is 
becoming obvious that the Euro-Atlantic world , whose economic and political 
model seemed so triumphant 20 years ago , is now lagging somewhat behind China 
and other Asian countries . So is Russia , where , despite encouraging talk 
about innovation-based development , the economy continues to de-modernize as 
corruption has been allowed to metastasize , and as the country relies 
increasingly on its natural-resource wealth . Indeed , it is Asia that has 
turned out to be the true winner of the Cold War . These rising power
 s raise problems regarding Russia’s geo-strategic choices . For the first 
time in decades , the values gap between Russia and the EU appears to be 
increasing . Europe is overcoming state nationalism , while Russia is building 
a nation state . Broken by history and not wishing to be ravaged by war again , 
Europeans have embraced compromise and renounced the direct use of force in 
international relations . Russians , on the other hand , emphasize their “ 
hard power , ” including military force , because they know that they live in 
a dangerous world and have no one to hide behind . And , because of the 
country’s comparative lack of “ soft power ” – social , cultural , and 
economic attractiveness – it stands ready to use the competitive advantages ( 
i. e. , its resource wealth ) available to it . Internal political developments 
in Russia are also pushing the country in a different direction from the West . 
Quite simply , Russia is moving away from democracy . This emergi
 ng values gap is not an insurmountable obstacle to geostrategic rapprochement 
. But , coupled with mutual irritation , which is particularly strong in Russia 
, closing the gap is becoming much harder . For , while Russia ’ s elite 
never considered itself defeated in the Cold War , the West essentially treated 
Russia as a defeated country – an attitude symbolized by NATO’s eastward 
expansion , which laid a deep foundation for ongoing tension . It was only 
after the West encountered an armed rebuff in South Ossetia that NATO expansion 
was stopped in its tracks . Yet NATO has not given up on further enlargement . 
NATO expansion is nothing more than the extension of its zone of influence – 
and in the most sensitive , military-political sphere . And yet the West’s 
unwillingness to abandon that effort is coupled with a repeated refusal to 
recognize Russia’s right to have its own zone of interest . So NATO expansion 
has left the Cold War unfinished . The ideological and militar
 y confrontation that underlay it is gone , but the geopolitical rivalry that 
it entailed has returned to the fore . Thus , the old mentality survived on 
both sides . Energy debates are another example of this . Non-Russian Europe 
should thank the Almighty for the presence of energy-rich Russia at its borders 
, while Russia should be thankful for having such wealthy customers . But the 
natural differences in the interests of energy consumers and producers have 
been given a political/security twist – witness the discussions about an “ 
Energy NATO . ” F aced with the impossibility of advantageous accession to 
Euro-Atlantic institutions , Russia is drifting fast towards alignment with 
China – a “ younger brother , ” though a respected one . Russia’s “ 
Asian choice ” of today is not the same as the Slavophile/Eurasian choice of 
the past . On the surface , it looks like a choice in favor of a rapidly rising 
civilization . But the current estrangement from Europe – the 
 cradle of Russian civilization and modernization – threatens Russia’s 
identity and will increase its geostrategic risks in the future . Europe does 
not benefit from this estrangement either . It will continue to move towards 
beautiful decay – Venice writ large . The United States also loses . Without 
Russia , which will remain the world’s third strongest power for the 
foreseeable future , it is impossible to solve the key problems of 
international security . The current Euro-Atlantic security architecture seems 
to suit the majority of Americans and Europeans , though it is becoming 
increasingly fragile and counterproductive . So Russia will struggle to create 
a new architecture largely on its own – whether through a new treaty on 
collective European security , or even through its accession to NATO . This is 
not only in Russian political and civilizational interest , but it also 
reflects our duty to the entire community of Euro-Atlantic nations , which is 
being weakened by 
 the “ unfinished Cold War . ” The idea of a “ Union of Europe ” 
between Russia and the EU should be put on the long-term agenda . That Union 
should be based on a common human , economic , and energy space . The 
combination of a new security arrangement for the Euro-Atlantic community and 
the establishment of the Union of Europe could arrest the decline in the 
international weight of the West . 
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+China and Russia in the New World Disorder Can Kosovo achieve independence 
without the tacit consent of Russia , and can there be a humanitarian and 
political solution to the tragedy in Darfur without the active goodwill of 
China ? The two crises have nothing in common , but their resolution will 
depend in large part on whether these two permanent members of the United 
Nations Security Council use their veto power . Comparing the respective 
abilities of Russia and China to block key international initiatives makes no 
sense in itself , but it does constitute a useful tool for understanding the 
transformation of the international system that is now taking place as a direct 
consequence of the relative decline of America’s global power . From that 
standpoint , the deepening of chaos in the Middle East poses both opportunities 
and risks for Russia and China , which may force them to define the roles they 
want to play and the images they want to project in the world . The key 
question i
 s this : Is Russia taking giant steps in the “ wrong direction ” while 
China is taking “ minuscule ” steps in the “ right direction ” ? 
Superficially , Russia and China may give the impression that they are pursuing 
the same path when they both proclaim with pride that they are “ back ” on 
the world stage . But this boast means different things for each country . For 
China , a deeply self-confident country , to be “ back ” simply means 
regaining the country’s historical centrality in the world after an absence 
of more than two centuries . After all , at the end of the eighteenth century , 
China became the world’s first producer of manufactured goods , and it 
perceives itself as a center of civilization unequalled by any other in Asia , 
if not the world . China’s renewed self-confidence is based on its remarkable 
economic prowess , which is derived not from natural resources , but from 
productivity and creativity . Whatever the huge political , social , and 
 economic tensions may exist , there is a “ feel good ” factor in China , a 
sense of progress , with the 2008 Olympics in Beijing figuring as the symbolic 
moment that will proclaim to the world the scale of the country’s 
achievements . Above all , with the exception of the Taiwan issue , China is a 
satisfied status quo power when it comes to the evolution of the international 
system – a patient actor that finds it perfectly legitimate to behave and to 
be seen as the world’s number two power . By contrast , the Russians remain 
insecure about their status in the world . Russia’s explosive “ revisionist 
” behavior on the eve of the recent G8 summit is an indication of the 
Kremlin’s “ unsatisfied ” nature . Because they know they are less potent 
, particularly in demographic and economic terms , Russians feel they have to 
do “ more . ” For them , to say “ Russia is back ” means that the 
humiliating Yeltsin years are over , and that they now must be treated a
 s equals , particularly by the United States . Russians are nostalgic not for 
the Cold War as such , but for the international status they lost when it ended 
. Now that America is no longer a “ hyperpower ” with no strategic 
challengers , Russia has reasserted its status as a “ superpower , ” a 
claim that is not necessarily supported by reality . Unlike the Chinese , the 
Russians do not create economic wealth , but merely exploit their energy and 
mineral resources . Moreover , unlike the Chinese , they have not always been 
confident of their position in the world . Torn between Europe and Asia in 
cultural and political terms , victimized by a dark , narcissistic instinct 
that pervades their reading of their past and their visions of the future , it 
should surprise no one that Russia is now behaving like a “ revisionist ” 
power . Unsatisfied with their inner identity , it is only natural that 
Russians should demand changes that make them feel more secure and proud . Less 
 than 20 years ago , the Czech Republic and Poland were part of their sphere of 
influence , so Russians understandably cannot accept the US unilaterally 
implanting its security system there . Of course , in their respective 
judgments on Russia and China , the West – and Europeans in particular – 
may be demonstrating selective emotions . “ We ” tend to be less demanding 
of China than of Russia , because we tend to see Russia as “ European ” ( 
at least culturally ) . As a result , the culture of physical violence and 
verbal provocation that is gaining ground in Putin’s Russia is deeply 
disturbing , whereas we tend to judge Chinese misdeeds with a greater sense of 
distance , if not indifference . But the differences between Russia and China 
today may prove to be less significant tomorrow if the deterioration in the 
Middle East imposes a sense of collective responsibility on all five permanent 
members of the UN Security Council . It is one thing for Russia and China to 
expl
 oit America’s growing difficulties from Gaza to Kabul ; but it is quite 
another if the situation deteriorates to the point of general destabilization 
in the region . Indeed , the Middle East’s deepening problems may impose a 
sense of restraint in Russia and China by forcing them to calculate not in 
terms of their global “ nuisance value ” vis-à-vis the West , but in terms 
of their ability to make a positive and stabilizing contribution to the world 
order . 
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+The Roots of Chinese/Japanese Rivalry BOSTON – The anti-Japan protests that 
continue to roil China are just another indication of the rise of a potent 
Chinese nationalism . After a century slowly fomenting among Chinese 
intellectuals , national sentiment has captured and redefined the consciousness 
of the Chinese people during the last two decades of China’s economic boom . 
This mass national consciousness launched the Chinese colossus into global 
competition to achieve an international status commensurate with the 
country’s vast capacities and the Chinese people’s conception of their 
country’s rightful place in the world . Rapidly , visibly , and inevitably , 
China has risen . Indeed , our era will likely be remembered as the time when a 
new global order , with China at the helm , was born . Competitive national 
consciousness – the consciousness that one’s individual dignity is 
inseparably tied to the prestige of one’s “ people ” – worked its way 
into the mind
 s of China’s best and brightest between 1895 and 1905. In 1895 , China was 
defeated by Japan , a tiny aggressor whom the Chinese dismissively called wa ( 
the dwarf ) . China was already accustomed to rapacious Western powers 
squabbling over its riches , but had remained self-confident in the knowledge 
of these powers ’ irrelevance . However , the assault from Japan , a speck of 
dust in its own backyard , shattered this self-assurance and was experienced as 
a shocking and intolerable humiliation . Japan’s triumph in 1905 over “ the 
Great White Power , ” Russia , repaired the damage to China’s sense of 
dignity . From the Chinese point of view , Russia was a formidable European 
power , one feared by other Western powers . Its defeat , therefore , was seen 
as a successful Asian challenge to the West , in which China , its 
intellectuals felt , was represented by Japan . Japan thus became the focus of 
Chinese attention . Gentlemen-scholars , who would reform and staff the Chin
 ese army and civil service in the early decades of the twentieth century , 
went to study in Japan . The Revolution of 1911 was inspired by the example of 
Japan’s Meiji Restoration ; and , because early-twentieth-century Japan was 
stridently nationalistic , the new China that emerged from its image was 
constructed on nationalist principles as well . Thus Japan became the 
significant “ other ” for China , the model that was imitated and the 
anti-model that was resented . Chinese nationalism borrowed from Japan its 
concept of the nation , including the very word by which it was expressed ( 
kuoming , from the Japanese kokumin ) . The Kuomintang ( the Chinese 
Nationalist Movement ) was explicitly inspired by Japan and fueled by repeated 
Japanese aggression . Paradoxically , but not unexpectedly , Mao Zedong’s 
struggle against the Kuomintang was inspired by anti-Japanese nationalism as 
well . As was the case virtually everywhere else , communism in China was 
nationalism incarnate 
 . Mao’s speech on the establishment of the People’s Republic plainly 
expressed the nationalist agenda behind it . Calling the nation “ communist 
” assured the new People’s Republic of China of the Soviet Union’s 
support , which was viewed by Mao as more reliable than that of the United 
States . But neither the Russian nor the Chinese Communists were ever unclear 
about the nationalist nature of their respective projects . The upper echelons 
of the bureaucracy and intelligentsia in Russia and China were self-consciously 
nationalist and , throughout Communist rule , shrewdly pursued the supreme 
nationalist goal : prestige – the power , naked and otherwise , to impose the 
nation’s will on others . But national consciousness , particularly in China 
, was limited to a narrow elite , leaving the masses almost untouched . This 
changed dramatically with the Chinese government’s restoration of a 
capitalist economy . Much like in Germany in the 1840’s , when the appeal to p
 rivate enterprise converted the entire middle class to nationalism , the 
explicit definition of economic power as the central pillar of China’s 
greatness awakened ordinary Chinese to nationalism’s appeal . Hundreds of 
millions now see themselves as sharing in the nation’s dignity , and are 
eager to contribute to it , as well as to defend it from insult . Competition 
for prestige , even when the contest is economic , is not a purely rational 
undertaking . So it should be no surprise that old injuries are likely to 
resurface . Some Chinese , especially those who are not economically successful 
, harp bitterly on Japan’s past depredations . Despite China’s embrace of 
capitalism and Japanese investment , Japan remains China’s reviled other . 
Indeed , a professor in Beijing told me not long ago , “ Two in every ten 
Chinese dislike the US , but nine in every ten hate Japan . ” For the West , 
there is a silver lining in this nationalist rivalry : neither China nor Japan 
is 
 a rogue state , and , so long as their quarrels do not lead to the use of 
unconventional weapons , we may treat the friction between them as an internal 
Asian quarrel . Japan , moreover , is likely to let today’s passions over 
disputed islands in the East China Sea cool down , despite the anti-Japanese 
outbursts in Chinese cities . But the West – and the US in particular – is 
new to dignity games à la Chinois . If it gets carried away and presumes to 
talk down to the 5,000-year-old culture of the Sages , the West could become 
the next object of China’s nationalist resentment . 
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+China’s Cyber-Warriors NEW DELHI – The world now accepts that protecting 
our atmosphere , hydrosphere , lithosphere , and biosphere – the “ global 
commons ” – is the responsibility of all countries . The same norm must 
apply to cyberspace , which is critical to our everyday life , economic 
well-being , and security . At a time when cyber attacks are increasing 
worldwide , US Secretary of State Hillary Clinton was right to declare that an 
attack on one nation’s computer networks “ can be an attack on all . ” 
Indeed , the attacks are a reminder that , as a new part of the global commons 
, cyberspace already has come under threat . Cyberspace must be treated , along 
with outer space , international waters , and international airspace , as 
property held in common for the good of all . And , like ocean piracy and 
airplane hijacking , cyber-crime cannot be allowed to go unpunished if we are 
to safeguard our common assets and collective interests . Naming China among a 
ha
 ndful of countries that have stepped up Internet censorship , Clinton warned 
that “ a new information curtain is descending across much of the world . ” 
Her statement , with its allusion to the Cold War-era Iron Curtain , amounted 
to an implicit admission that the central assumption guiding US policy on China 
since the 1990’s – that assisting China’s economic rise would usher in 
greater political openness there – has gone awry . The strategy of using 
market forces and the Internet to open up a closed political system simply is 
not working . Indeed , the more economic power China has accumulated , the more 
adept it has become in extending censorship to cyberspace . If anything , China 
has proven that a country can blend control , coercion , and patronage to 
stymie the Internet’s politically liberalizing elements . Through discreet 
but tough controls , Beijing pursues a policy of wai song , nei jin – relaxed 
on the outside , vigilant internally . Google is now crying f
 oul over “ a highly sophisticated and targeted attack on our corporate 
infrastructure originating from China . ” But , despite its corporate motto 
– “ Don’t be evil ” – Google itself was instrumental in aiding online 
censorship in China , having custom-built a search engine that purges all 
references and Web sites that the Chinese government considers inappropriate . 
Now Google itself has become a victim of China’s growing cyber prowess , in 
the same way that appeasement of Hitler boomeranged onto France and Britain . 
China deploys tens of thousands of “ cyber police ” to block Web sites , 
patrol cyber-cafes , monitor the use of cellular telephones , and track down 
Internet activists . But the threat to the new global commons comes not from 
what China does domestically . Rather , it comes from the way in which the 
know-how that China has gained in fashioning domestic cyber oversight is 
proving invaluable to it in its efforts to engage in cyber intrusion across it
 s frontiers . Canadian researchers have discovered a vast Chinese surveillance 
system called “ GhostNet , ” which can compromise computers in 
organizations abroad through booby-trapped e-mail messages that automatically 
scan and transfer documents to a digital storage facility in China . This is 
what happened when computers of the Tibetan government-in-exile in Dharamsala , 
India , were attacked last year . India’s national security adviser recently 
complained that his office was targeted yet again by hackers . “ People seem 
to be fairly sure it was the Chinese , ” he said . Officials in Germany , 
Britain , and the US have acknowledged that hackers believed to be from China 
also have broken into their government and military networks . The 
state-sponsored transnational cyber threat is at two levels . The first is 
national , with the hackers largely interested in two objectives . One is to 
steal secrets and gain an asymmetrical advantage over another country . Cyber 
intrusi
 on in peacetime allows the prowler to read the content and understand the 
relative importance of different computer networks so that it knows what to 
disable in a conflict situation . The other objective is commercial : to pilfer 
intellectual property . The second level of cyber threat is against chosen 
individuals . The most common type of intrusion is an attempt to hack into 
e-mail accounts . The targets also can face Trojan-horse attacks by e-mail 
intended to breach their computers and allow the infiltrators to corrupt or 
transfer files remotely . To be sure , if a cyber attack is camouflaged , it is 
not easy to identify the country from which it originated . Through the use of 
so-called “ false-flag espionage ” and other methods , attacks can be 
routed through the computers of a third country . Just as some Chinese 
pharmaceutical firms exported to Africa spurious medicines with “ Made in 
India ” labels – a fact admitted by the Chinese government – some Chinese 
hacker
 s are known to have routed their cyber intrusion through computers in Russia , 
Iran , Cuba , and other countries . But , like their comrades in the 
pharmaceutical industry , such hackers tend to leave telltale signs . Then 
there are many cases in which the attacks have originated directly from China . 
It seems unlikely that these hackers , especially those engaged in cyber 
espionage , pilferage , and intimidation , are private individuals with no 
links to the Chinese government . It is more likely that they are tied to the 
People’s Liberation Army . In war , this irregular contingent of hackers 
would become the vanguard behind which the PLA takes on the enemy . Systematic 
cyber attacks constitute a new frontier of asymmetrical warfare at a time when 
the world already confronts other unconventional threats , including 
transnational terrorism . With national security and prosperity now dependent 
on the safekeeping of cyberspace , cybercrime must be effectively countered as 
an intern
 ational priority . If not , cyberspace will become the new global-commons 
battlefield . 
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+China’s Gift to Europe Europeans are wrong to be angry with China because 
its currency peg to the US dollar has boosted the euro against most currencies 
on foreign exchange markets . On the contrary , they should view the currency 
peg as a valuable gift . In New York and other American cities , European 
shoppers are on a spree . They’re enjoying first hand the euro’s enhanced 
purchasing power abroad . The currency peg has also helped make the euro into 
an important reserve currency , rivaling the dollar . Investments from all over 
the world are flowing into Europe as a result . It was predictable that 
China’s currency peg would have this effect . It forced China to accumulate 
huge amounts of dollars to stabilize its currency and gave the euro an extra 
boost as the dollar depreciated . To protect itself from the declining 
greenback , China and other countries are converting a portion of their 
accumulated dollar reserves into euros . The International Monetary Fund 
estimates t
 hat the euro’s share of foreign exchange reserves rose to 26.4 percent in 
third quarter of 2007 from 25.5 percent in the second quarter of 2007 , and 
24.4 percent in the third quarter of 2006. The euro’s becoming a major 
reserve currency bestows important economic advantages on the euro-zone economy 
. Europeans should thank the Chinese currency peg for the part it is playing in 
this . Of course , with an augmented supply of euros , China can be expected to 
make substantial investments in Europe , which also is a good thing , 
especially since , in the United States at least , China has demonstrated a 
preference for investments in financial institutions rocked by the sub-prime 
crisis . Europe has plenty of those . So far , China’s biggest European 
investment has been in the Belgian financial company , Fortis N. V. , where 
Ping An Insurance recently acquired a 4.2 % stake , making it the largest 
shareholder in the company . China Development Bank also made an investment in 
Barcla
 ys to bolster its bid for ABN AMRO which , though it failed , helped the Dutch 
bank get the full value for its assets . This is only a start . Merrill Lynch 
predicts that , as currency reserves climb in countries like China , state-run 
investment funds will grow to $7.9 trillion , from $1.9 trillion now . 
China’s currency peg has also come in handy for Europe in its fight to keep 
inflation in check , while its monetary policy remains constrained by the 
sub-prime crisis . Experts estimate that , in terms of guarding against 
inflation , the euro’s appreciation has been equivalent to about 35 basis 
points rise in the interest rate . The strong euro has helped insulate Europe 
from skyrocketing oil and commodity prices , which are priced in dollars on the 
world markets . The big downside of the currency peg for Europe is supposed to 
be exports . That’s what sent French President Nicolas Sarkozy and other 
high-level European officials scurrying off to China last November—and why m
 any ordinary Europeans continue to think of the Chinese as not playing by the 
rules . This is protectionist thinking par excellence . What makes exports so 
special ? Why are they more important than cheap imports or the bargains that 
European shoppers get in New York ? Should Europe give up all the advantages of 
the currency peg just because it makes European exports more expensive ? Of 
course not ! Note that it was French President Sarkozy who went to China to 
protest the currency peg , not German Chancellor Angela Merkel . German exports 
are not being substantially damaged by the strong euro—indeed , German costs 
are so competitive that exporters are confident they can cope with the euro at 
1.50 dollars and even higher . This is not true for France-- but the answer is 
obvious : reduce costs and France too will be able to cope with the strong euro 
. In the final analysis , cutting costs is all the Europeans can do if they 
want to preserve the competitiveness of their exports . Th
 e Chinese are not going to change their exchange rate regime , which has 
strategic as well as economic motivations , just because the Europeans are 
unhappy with the currency peg . China has given the Europeans a gift . They 
should be grateful , rather than foolishly insist that China take it back . 
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+China’s Threat to Russia Last week , Russia and China held joint military 
maneuvers in the presence of both Russian President Vladimir Putin and Chinese 
President Hu Jintao . But a new strategic alliance between the two countries is 
not likely , as it is China that poses the greatest strategic threat to Russia 
, although many in the Kremlin seem blind to this as they rattle sabers at 
America and the West . Indeed , China officially considers several regions in 
Russia’s Far East to be only “ alienated ” from it . China’s 
territorial claims on Russia are often noted in Chinese grade school geography 
textbooks , which include a number of Russian Far Eastern regions within 
China’s borders . This is consistent with the Chinese strategic concept of 
“ vital space , ” which includes all spheres of a state’s strategic 
activities , on land , at sea , under water , in the air , and in space . The 
dimensions of “ vital space ” are determined by a country’s economic , sci
 entific , technical , social , and military capabilities – in essence , its 
“ total power . ” According to Chinese theorists , the “ vital space ” 
of great powers extends far beyond a state’s borders , whereas the “ vital 
space ” of weak countries is limited to strategic boundaries that do not 
always correspond to the borders of their national territory . Today , China 
has territorial claims against 11 of its 24 neighbors , including India , Japan 
, Vietnam , and the Philippines , in addition to Russia . In China’s 
relations with all of them , the potential use of military force was and 
remains an important factor . In September 2006 , China’s People’s 
Liberation Army ( PLA ) conducted an unprecedentedly large 10-day exercise , 
involving the Shenyang and Beijing military districts , the two most powerful 
of China’s seven military districts . Shenyang abuts the Russian Armed Forces 
’ Far Eastern District , and the Beijing district shares a border with Russia
 ’s Siberian Military District . During the exercises , Shenyang units 
advanced 1,000 kilometers into the Beijing district , where they engaged in 
joint war games . To military observers , the Beijing/Shenyang exercises seemed 
to be practice for a possible offensive operation against Russia , because 
exercises on such a scale are undertaken only at the final stage of a 
multi-year program to train troops to enact specific strategic and operational 
plans . The geography of the exercises , and the offensive nature of the tasks 
undertaken , leaves little doubt that Russia was cast in the role of “ 
potential adversary . ” Such a show of force is an ancient , traditional 
Chinese political technique . Paradoxically , these exercises were undertaken 
during a period when bilateral political and economic ties appeared on the 
surface to be at their highest point . Russia has an important place in Chinese 
geopolitical calculations , as a supplier of both modern weaponry and energy 
resource
 s needed to continue its modernization . Therefore , the Chinese are doing 
everything possible to strengthen their economic and political position in 
Russia , and to draw Russia into their sphere of influence . And China is 
succeeding , most importantly by consistently reinforcing Putin’s 
anti-American and anti-Western agenda . While Beijing/Shenyang exercise should 
have indicated to Russian leaders that China’s intentions toward Russia may 
not always be benign , Russia’s political and military leadership seem not to 
sense any threat ; on the contrary , they continue to sell the Chinese advanced 
weapons . Russia’s current diplomatic tilt , indeed , is clearly against its 
own long-term national security interests . China will never be interested in 
Russia’s economic and political modernization , for it prefers Russia to 
remain a source of mineral and energy resources and a vast “ strategic rear 
” in its looming challenge with the United States . Likewise , the Shanghai 
 Cooperation Organization ( SCO ) , which just concluded its annual meeting , 
is in China’s eyes a tool of regional policy that helps strengthen China’s 
influence and control over Central Asia’s natural resources at the expense of 
Russia . No nation threatens China’s land borders . China can solve its 
domestic problems , such as separatism , by itself . China is militarily 
self-sufficient and needs military cooperation under the SCO framework only in 
order to free its hands if any conflict should arise that affects its interests 
. In fact , conflict between Russia and China is possible precisely in Central 
Asia , given the clear differences in the two countries ’ economic and 
political interests in that region . Aside from control of the region’s 
energy supplies , water has become a potential source of conflict , given 
China’s serious shortages . Yet , while the Chinese clearly understand these 
contingencies and are preparing themselves to deal with them diplomatically 
 and militarily , the Kremlin remains myopically obsessed with the phantom 
threat of America . Thus , as the Kremlin dreams of re-establishing its 
domination over what Russians refer to as the “ near abroad ” ( Ukraine , 
Belarus , the Baltic countries , and the other post-Soviet states ) , China is 
increasingly looking at Russia as its own “ near abroad . ” Will the 
Kremlin finally wake up to this ? Thirty-six years ago , Richard Nixon and Mao 
Zedong turned world politics upside down , as both America and China realized 
that it was the Soviet Union , and not each other , that posed the greater 
threat . Vladimir Putin needs his own “ Nixon moment . ” Alienating the 
West is a foolish strategy when the greatest long term threat to Russia comes 
from the East . 
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+Europe’s Vital French Connection PARIS – In the debates raging over the 
future of the European Union and the eurozone , Germany always takes center 
stage . It has the largest economy , accounting for 28 % of eurozone GDP and 25 
% of the eurozone’s population . It is running a current-account surplus that 
is now larger than China’s – indeed , the largest in the world in absolute 
value . And , while weighted majorities can overrule it on some issues , 
everyone acknowledges that little can be done in the eurozone unless Germany 
agrees . But the emphasis on Germany , though justified , should not lead to an 
underestimation of France’s critical role . France not only accounts for 
roughly 22 % of eurozone GDP and 20 % of its population – behind only Germany 
– but also has the healthiest demography in the eurozone , whereas the German 
population is projected to decline over the next decade . At the same time , 
France’s critical role reflects more than its size . Indeed , 
 in terms of influencing outcomes in Europe , France is as important as Germany 
, for three reasons . First , France is an indispensable link between southern 
and northern Europe at a time of growing economic and financial division 
between creditors and debtors ( a fissure that has begun to assume a cultural 
dimension ) . An active France can play a bridging role , leveraging its strong 
relationship with Germany ( a friendship that is a pillar of the EU ) and its 
proximity and cultural affinities to the Mediterranean . France is “ southern 
” in its current-account deficit , but “ northern ” in its borrowing 
costs ( slightly above Germany’s ) , owing partly to inflows of capital 
fleeing the south , as well as to modest but positive economic growth . 
Moreover , there is no perceived “ re-denomination ” risk affecting French 
assets , given markets ’ confidence that France will retain the euro . So , 
while France faces huge economic challenges , its northern and southern 
 features permit it to play a proactive role in the European project’s 
survival . French President François Hollande has already given a rather 
successful preview of this role , meeting German Chancellor Angela Merkel in 
Berlin on his first day in office , and , a month later , participating in a 
high-profile meeting with the Italian and Spanish prime ministers in Rome . 
Indeed , he took the lead in adding a “ growth pact ” to the “ stability 
pact ” that had been negotiated under Merkel’s leadership . Second , France 
, under its new center-left government , must demonstrate that the “ European 
model ” of a market economy coupled with strong social solidarity can be 
reformed and strengthened , rather than abandoned – not just in Europe’s 
more pragmatic north , but also in its more ideological south . French 
Socialists will not renounce their traditional commitments ; nor should they . 
But they now have the opportunity to contribute to the European model’s renewa
 l . Under Hollande , France’s Socialists favor achieving that renewal 
through a process of social dialogue that convinces rather than imposes , that 
focuses both on revenue measures and on boosting government efficiency , and 
that may adopt some of northern Europe’s more successful “ flexicurity ” 
policies , which combine greater labor-market flexibility with strong social 
protection . The reforms should also introduce much greater individual choice , 
permitting solutions to retirement , education , health , and lifestyle issues 
that can be more easily tailored to citizens ’ specific circumstances and 
needs . The government of Hollande and Prime Minister Jean-Marc Ayrault has 
strong majorities at all executive and legislative levels , giving it a rare 
opportunity to act . If it can renew the European model at home , it will be 
able to project that success much more widely , particularly in southern Europe 
, in turn reinforcing confidence and belief in the EU , particularly
  among the young generation . The French center-left must lead in conceiving a 
vision for Europe in which solidarity and equity reinforce long-term economic 
strength . Finally , along with the United Kingdom among European countries , 
France retains more of a global role than Germany has yet acquired . While the 
United Nations Security Council is outdated in its structure , it still plays a 
crucial legitimizing role ; and France , not Germany , is a member . In many 
other international organizations as well , France punches above its weight . 
Similarly , while France exports much less than Germany outside the EU , many 
large French enterprises rival Germany’s in global reach and technical 
know-how . And French is still a global language . In other words , France not 
only is a link between Europe’s north and south , but also contributes 
substantially to linking Europe to the rest of the world . Europe needs a 
renewed vision and effective policies to realize that vision . Franceâ€
 ™s Socialist-Green government can play a critical unifying role as Europeans 
confront their biggest challenge in decades . Its success will be highly 
consequential – not least for the political debate that will inform the 
outcome of Germany’s elections in 2013. 
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+Exchange Rate Disorder NEW YORK – Two troubling features of the ongoing 
economic recovery are the depressed nature of world trade and the early revival 
of international global payment imbalances . Estimates by the International 
Monetary Fund and the United Nations indicate that the volume of international 
trade in 2010 will still be 7 % to 8 % below its 2008 peak , while many or most 
countries , including industrial nations , are seeking to boost their current 
accounts . Indeed , if we believe the IMF’s projections , the world 
economy’s accumulated current-account surpluses would increase by almost $1 
trillion between 2009 and 2012 ! This is , of course , impossible , as 
surpluses and deficits must be in balance for the world economy as a whole . It 
simply reflects the recessionary ( or deflationary ) force of weak global 
demand hanging over the world economy . Under these conditions , export-led 
growth by major economies is a threat to the world economy . This is true for 
Chi
 na , Germany ( as French Finance Minister Christine Lagarde has consistently 
reminded her neighbor ) , Japan , and the United States . Countries running 
surpluses must adopt expansionary policies and appreciate their currencies . 
More broadly , to the extent that major emerging-market countries will continue 
to lead the global recovery , they should reduce their current-account 
surpluses or even generate deficits to help , through increased imports , 
spread the benefits of their growth worldwide . But , while that implies that 
emerging-market currencies must strengthen , disorderly appreciations would do 
more harm than good . To use an American saying , it might mean throwing out 
the baby ( economic growth ) with the bathwater ( exchange rate appreciation ) 
. Consider China , which accounts for the largest share by far of world trade 
among emerging economies . Real appreciation of the renminbi is necessary for a 
balanced world economic recovery . But disorderly appreciation may seri
 ously affect China’s economic growth by disrupting its export industries , 
which would generate major adverse effects on all of East Asia . China needs a 
major internal restructuring from exports and investments , its two engines of 
growth in past decades , to personal and government consumption ( education , 
health , and social protection in the latter case ) . But this restructuring 
will tend to reduce , not increase , import demand , as exports and investment 
are much more import-intensive than consumption . Moreover , a sharp 
appreciation of the renminbi could risk domestic deflation and a financial 
crisis . Chinese authorities certainly seem to have that interpretation of the 
roots of Japan’s malaise in mind as they seek to avoid rapid revaluation . 
The only desirable scenario , therefore , is a Chinese economy that transmits 
its stimulus to the rest of the world mainly through rising imports generated 
by rapid economic growth ( i. e. , the income effect on import demand ) 
 , rather than by exchange-rate appreciation ( the substitution effect ) . This 
requires maintaining rapid growth while undertaking a major but necessarily 
gradual domestic restructuring , for which a smooth appreciation is much better 
suited . Now consider other major emerging markets . Here currency appreciation 
is already taking place , pushed by massive capital inflows since the second 
quarter of 2009 , and in some cases it can already be said to be excessive ( 
for example , in Brazil ) . These countries can , of course , resist upward 
pressure on their currencies by accumulating foreign-exchange reserves , like 
they did before the global financial crisis . The result is , of course , 
paradoxical : private funds that flow into these countries are recycled into US 
Treasury securities via investment of accumulated reserves . Why should 
emerging-market countries ’ central banks undertake this peculiar financial 
intermediation , which represents a major cost , as the yield of priva
 te funds is higher than that of reserves ? The implication here is that 
relying on free movement of capital to achieve exchange-rate appreciation and 
current-account deficits may generate a myriad of problems , including slower 
economic growth and the threat of asset bubbles and financial crises of their 
own . So , a more orderly way to induce current-account deficits without 
risking disruption of emerging economies ’ growth should be considered . One 
solution ( already advocated by some , including me , and adopted to some 
extent by a few countries ) is broader use of capital-account regulations . 
Surprisingly , however , this issue has been entirely absent from current 
global debates on financial reform . Fortunately , the IMF opened the door to 
discussion of this issue in a recent staff position paper . Equally important , 
a desirable global scenario is possibly one in which most developing countries 
run current-account deficits . But this requires major reforms in the global f
 inancial system to reduce the vulnerabilities that such deficits generated in 
the past , and that were reflected in major financial crises in the developing 
world . These past crises gave rise to a form of “ self-insurance ” among 
developing countries through reserve accumulation . This helped many of them 
weather the recent storm , but it also contributed to global payments 
imbalances . Recent IMF reforms are just a step in the direction of trying to 
create better financial instruments to help these countries . It is essential , 
in particular , to create reliable large-scale financing for developing 
countries during crises , through a mix of counter-cyclical issuance of SDRs 
and emergency financing without onerous conditions . 
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+France and Germany Must Act in Iraq Next week , President Bush , President 
Chirac , and Chancellor Schroeder will meet on the cliffs of Normandy to mark 
the 60th anniversary of the D-Day invasions that led to the liberation of 
Europe . They should also seize the moment to liberate themselves from the 
bitterness that has divided the Atlantic Alliance over the Iraq War , argue 
Pierre Lellouche and Christoph Bertram . When the United States launched the 
war against Saddam Hussein 's Iraq , France and Germany rightly warned that the 
invasion could well end up worsening instability in the Middle East and 
increase the threat of radical Islamic terror . But now that America and its 
coalition have proven themselves to be incapable of bringing stability to Iraq 
on their own , the French and German governments can no longer rest and smugly 
say , " I told you so , " as the situation deteriorates even further . Both 
governments must now become seriously and fully engaged in what must now be a u
 nited Western effort . Of course , it would be best for everyone - France and 
Germany included - if the current US-led coalition were to succeed and Iraq 
could turn into a pillar of Middle East stability and modernization . Yet , 
however desirable this outcome , it is no longer likely ( if it ever was ) . 
Internal stability and economic recovery continue to be elusive , with the 
specter of civil war hovering ever closer . A divided Iraq at war with itself 
would be a disaster for the region , for America 's international credibility 
and authority , and for transatlantic relations . In an already fragile region 
, a major Arab country like Iraq would most likely prompt interventions by its 
nervous neighbors - of which there is no shortage - if it turns into a failed 
state . Instead of the rule of law , there would be the law of the mafia , of 
terrorist groups , and of tribal militias . Many of them are already in place . 
Instead of moving toward modernization and development , the regi
 on would be confirmed as a cockpit for conflict , a threat to itself and to 
the world beyond . Were the US forced to withdraw in failure , Islamic 
terrorist groups would claim a historic victory , promising more bloodshed for 
the West . Moreover , America might also once again retreat bitterly into 
isolationism , blaming her failure on the UN and on disloyal European allies . 
So the stakes are high in Iraq , for Europeans no less than for Americans . 
That is why it is time that even those who have been most skeptical about US 
policy in Iraq start to do something about it . Both Jacques Chirac and Gerhard 
Schroeder have repeatedly pronounced that what happens in Iraq is a strategic 
challenge to their countries . Yet their actions in response to this insight 
have been modest . The recent turmoil in Iraq has , on the contrary , 
strengthened those in both capitals who argue that there is now even less 
reason to get involved on the ground . At the very least , France and Germany 
are dema
 nding that the Bush administration openly admit to its failure and the need 
for help . Yet not only is such a demand naïve , with the Bush team battling 
for re-election , it is not at all certain that most of America 's European 
allies would heed a US call for solidarity if one were issued . Confronting the 
threat that an unsettled Iraq poses to Europe and to the transatlantic 
relationship implies stopping these tactical games . The passing of authority 
in Iraq from the US-led coalition to an Iraqi government and the need for a 
much stronger UN role now offers the chance and imposes the need for everyone 
to stop posturing and get serious . For their part , EU governments should 
provide the UN - on whose involvement in Iraq they have long insisted - with 
the protective force it needs to prepare nation-wide elections in Iraq later in 
the year , and ask others to join . A UN staff protected by US marines simply 
cannot do that job . With the consent of both the US and Iraq 's new leade
 rship , EU governments should also offer to organize an international 
conference uniting all those with a stake in Iraqi stability , including Iraq 
's neighbors , to work out a strategy and commit resources in order to save 
Iraq from slipping into protracted turmoil . If Europe is to act , France and 
Germany must lead . Precisely because they opposed the war , they are now the 
only countries that can restore Europe 's unity of action in promoting 
stability . France professes to bearing a special responsibility for 
international order , but so does Germany ; only a few weeks ago , Chancellor 
Schroeder based his claim to a permanent German seat in the UN Security Council 
on Germany 's readiness to shoulder such responsibilities . Of all the crisis 
regions in the world today , instability in Iraq constitutes the greatest 
challenge to international order . But France and Germany can also block 
European responsibility for international order and for solidarity with a US 
facing possible d
 efeat in Iraq . The decision is theirs . It is time for both to realize that 
the consequences of inaction will be no less severe for the region than for the 
Atlantic relationship . 
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