Global Trends by Martin
Monday 11 December 2006
Bush seems cool to calls for new Iraq policy
Last week saw two important
developments. First was the release of an establishment report calling
for a drastic change in American policy on Iraq and the Middle East.
Second was the sharp fall in the U.S. dollar. Both events could have
significant effect on global political and economic affairs.
Two interesting events took
place last week: the launch of an American report on Iraq that criticised
the present United States policy and called for a radical change, and
the sharp fall of the U.S. dollar against other major currencies. Both
may well have important effects on global affairs.
The report by the Iraq Study
Group, which is co-chaired by former U.S. State Secretary James Baker,
contained a bold attack on the Iraq policy of the Bush administration.
It said US mistakes had contributed to conditions that are now “grave
and deteriorating” and warned of chaos that could cause collapse of
the Iraqi government and a humanitarian crisis.
And it called for a change
of course. Most US troops should leave by 2008 (and local troops must
be trained now to take over security duties). And there must be a Middle
East initiative that includes involving Syria and Iran.
These two countries have
been considered by the Bush government as top enemies, but the Study
Group believes they have significant influence on the situation in Iraq
and thus they have to be involved in talks for a solution.
The report also pin-pointed
the Israeli-Palestinian conflict as a related problem and asked for
new efforts to resolve it.
Since the Study Group comprises
high-level Republicans and Democrats, its report was seen as an establishment
slap on the face of the administration’s policy and performance on Iraq.
Its proposals were thus given a high chance of success in getting President
Bush to change his policies.
At the report’s launch on
6 December, Bush said he welcomed its “tough assessment” and vowed to
take its conclusions seriously. But the next day, at a press conference,
he was already indicating he did not agree with a quick troop withdrawal,
nor would America hold talks with Iran or Syria unless they changed
Bush warned of heavy costs
of American troops leaving Iraq too soon. And the Israeli Prime Minister
Ehud Olmert denied there was a strong link between the Iraq crisis and
the need to resolve the Israel-Arab conflict.
On their part, the co-chairs
of the Study Group have piled the pressure on Bush by urging Congress
to endorse their proposals to effect a sharp change of American policy
Thus there appears to be
a big fight brewing within the U.S. political establishment, between
the “realist” camp that is for cutting America’s losses in Iraq and
pulling out by a near deadline while pushing for an Arab-Israel settlement
, versus the group around Bush (often called the neo-conservatives)
that wants to “stay the course” in Iraq and to continue to support Israel’s
aggressive measures against the Palestinians.
The next days and weeks will
see whether the Congress, newly controlled by the Democrats, can team
up with some Republicans to pressurize Bush to let go of the U.S. grip
on Iraq. It is less likely that the U.S. under Bush will suddenly take
on the role of peacemakers between Israel and the Palestinians.
Meanwhile, the continued
fall of the U.S. dollar sparked concern around the world. The dollar
has fallen to low points against the Euro (crashing through the one
Euro equals US$1.30 barrier) and other major currencies.
The immediate reason is the
emergence of more signs that the U.S. economy is weakening (for instance
there is a decline in house building), while there are signs that the
European economies are strengthening.
Many economists believe however
that the American trade deficit has been widening to incredible and
unsustainable levels, and that at some point there will be a fall of
the dollar. This point may now be reached.
Hints by various financial
officials in China that the country will diversify future foreign exchange
holdings and reduce the ratio of the dollar in its reserves have also
put currency investors and speculators on the alert.
While almost everyone agrees
that the U.S. dollar must inevitably fall, there is now a debate whether
this will take the form of a moderate and gradual decline, or a sudden
sharp fall causing panic and thus a downward spiral.
If a sudden fall takes place,
it could lead to (or be part of) a larger general turmoil in the world’s
currencies. The financial instability will then have a negative effect
on the global economy as well as the economies of many countries.
The countries that hold a
lot of assets in U.S.dollars (the main ones include China, Japan, Taiwan
and Singapore) are very worried that a sudden sharp fall in the value
of the dollar would mean tremendous losses to them, valued in terms
of what they can buy in terms of the other currencies.
They fear that if they pull
out significant amounts of their US dollar, the dollar would collapse.
On the other hand if they keep supporting the dollar, they will suffer
even more losses when the inevitable dollar fall takes place.
The two events of last week
are related to some extent. The hundreds of billions of dollars which
the U.S. spent on Iraq have contributed to the draining of its resources
and to the weakening of the dollar.
It is a rather dangerous
time for the world economy, as currency turmoil is a possibility. Developing
countries like Malaysia are still dependent on the American economy
for markets, and thus a slowdown or a recession of this giant economy
will have a negative effect on the developing countries.
We should thus look out for
what happens to the Baker report, and what happens to the U.S. dollar
in the next few days and weeks. They will help shape the political
and economic developments of the world in the near future.
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