Winners & Losers 2013

Around The World: Angela rose from the ashes, Abenomics shook Japan, and the Republican party lost control

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Angela Merkel

Eight years in, and more popular than ever

The start of 2013 looked grim for the German chancellor, but she parlayed Europe’s strongest economy into her country’s biggest electoral victory in decades

Angela Merkel

Steeliness is not Merkel’s only political asset, although it is her most defining. Even so, Germans have warmed to her personality

Krisztian Bocsi/Bloomberg/Getty

Even political leaders jump the shark. Suddenly their once fresh personality becomes drearily predictable and their style of governance, uplifting at first, slides down the scale to somewhere between stale and grating. That moment tends to arrive at the seven-year itch of their reign. Seven years is roughly when Stephen Harper began to stall in public esteem. British Prime Minister Tony Blair, too. Every two-term U.S. president since Nixon has limped through his eighth year (Reagan due to scandal, Clinton to philandering, Dubya to idiocy), and it’s a fair likelihood the current one will too. The French, steeped for generations in revolutionary brine, always seem eager to show outgoing presidents the door.

And then there’s Angela Merkel, the stiff, stern German chancellor. This past year—her eighth in power—started with a drubbing for her Christian Democratic Union party in state elections, a telltale sign she, too, had worn out her welcome. That’s certainly how it looked to many outsiders, and they had plenty of other factors to point to beyond the clock winding down. Merkel’s handling of the euro currency crisis had bred resentment beyond her country’s borders: a Pew research poll in May showed that people across Europe considered Germany the least compassionate and most arrogant country in the union. The Economist blamed her for making Europe’s crippling recession last far longer, and bite much deeper, than it should have. Moreover, the euro crisis has acted like a political grim reaper: since the crisis first broke in 2009, no incumbent eurozone government has survived an election, and at the beginning of the year, it looked like it was finally coming for her.

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Within Germany, however, perceptions were different. That same Pew study showed Germans to be much more optimistic than any other in Europe about their economy, their personal prospects and the future of the eurozone. While the rest of Europe flailed in the face of a soaring jobs crisis—double-digit unemployment rates across the EU, spiking above 25% in Spain and Greece—Germany’s jobless rate fell by half to just over 5%. In September Germany’s foreign trade surplus topped $29 billion, a new record. While its EU neighbours have complained that Germany’s export power is harming other euro economies, German manufacturing prowess—and the premium prices its goods command—is a matter of national pride that Merkel has refused to cede to Brussels.

Steeliness is not Merkel’s only political asset, although it is her most defining. Even so, Germans have warmed to her personality: her tics and quirks have become strangely beloved, such as her tendency to hold her hands at her waist with thumbs and forefingers touching—a pose that has widely come to be known as “the chancellor rhombus.”

Her childhood under Communist rule in the former East Germany is the subject of intense fascination in a country that is still patching up relations between its eastern and western halves. Some six books were published about her this year, including one that claims she served as “secretary for agitation and propaganda” for East Germany’s communist youth. Merkel quickly denied the claim, though she needn’t have bothered. Even if it were true, the notion of her as an agitator only provokes chuckles from citizens who have grown accustomed to her poker face.

But if Germans have taken eight years to finally appreciate her, Merkel’s appeal was also buffeted by an eventful 2013, one in which she showed she can still surprise on the policy front. She changed Germany’s stance on Turkey: she’d been hampering that country’s negotiations to join the eurozone since taking office in 2005, but in January reversed course and even led the push to restart talks with a February visit to Istanbul. She backed the purchase of weaponized drones for the German military—a plan since halted, but one that nonetheless fed the “Iron Frau” comparisons to Margaret Thatcher. She also showed her mettle when she led all of Europe in denouncing the U.S. government after whistleblower Edward Snowden revealed in June that the NSA had been spying on its allies, even at the highest levels of government—a confrontation that culminated with a direct call from Merkel to Barack Obama to ask, “Have you been bugging my phone?”

For September’s Bundestag elections the CDU decided to build its entire campaign around Merkel. It was a counterintuitive move: she is a notoriously bad campaigner, prone to giving up large leads in the polls before squeaking past the finish line.

Not this time. Her main challenger, the Social Democrats’ Peer Steinbrück, doomed his own campaign when he posed for Süddeutsche Zeitung Magazin giving the world the finger. Global media took notice, and everyone had a bit of a laugh, but in Germany they knew: Chancellor Merkel would never be so stupid. She was promptly re-elected, with the CDU receiving 41.5% of the vote and 311 seats in the Bundestag, falling a mere five short of forming Germany’s first majority government since 1957.

That five-seat deficit forced Merkel’s Christian Democrats to search for a coalition partner, a process that took two months and left a spate of key issues, both within Germany and at the EU level, unaddressed in the meantime. But in late November Merkel appeared at a press conference with the leader of the centre-left Social Democrats to unveil a whopping 185-page agreement. Merkel gave more ground than she would have preferred: the deal will lower Germany’s retirement age for some workers, and promises a $12.20 minimum wage, a policy unpopular with German business. The SPD must still put the agreement to a membership vote, which further extends the uncertainty. Several pundits speculated, tongue-in-cheek, that Merkel wore a bright green suit to the press conference as a subliminal threat: she would drop the SPD for its rival Green Party if they gave her any trouble. But her body language—the ever-neutral chancellor rhombus—betrayed nothing.

That’s the style that has characterized Merkel from the start: pragmatism, compromise, negotiation—but unwilling to brook any nonsense, and always ready with Plan B. It’s hard to imagine Merkel’s hot-headed, bird-flipping rival having either the stamina or the temperament to succeed in such intense negotiations. But then, few European leaders have shown her mettle, and in any comparison she comes out on top. From Italy’s libidinous Silvio Berlusconi to France’s preening Nicholas Sarkozy to Greece’s dithering George Papandreou, it’s Europe’s leading men who have been the irrational hysterics. Angela Merkel never loses her cool—and she has outlasted them all.


Shinzo Abe

Second time’s a charm

Japan is back on the road to recovery thanks to a bold experiment in ‘Abenomics’ that will have ripple effects around the world

Shinzo Abe

Shinzo Abe’s first foray as Japan’s prime minister didn’t go so well. His second is changing the country’s economic destiny

(Tomohiro Ohsumi/Bloomberg/Getty)

Japanese Prime Minister Shinzo Abe failed to distinguish himself in his first term in office (2006–07). His second is unfolding quite differently. Following his landslide election victory a year ago, he embarked as promised on ambitious reforms intended to reverse two decades of economic stagnation. It’s been dubbed “Abenomics,” and the world is watching closely; Mohamed El-Erian, CEO of global investment company PIMCO, has called it “nothing less than one of the boldest economic-policy experiments in Japan’s postwar history.” Early indications suggest it’s working.

Abe likens his approach to a quiver of arrows: individually each can be bent, but three held together cannot. His first arrow consists of aggressive monetary measures. Abe quickly browbeat a reluctant Bank of Japan into purchasing domestic securities—a practice known as quantitative easing. The scale of the commitment is staggering, given how small a country Japan is: US$77 billion per month, only a few billion less than the U.S. Federal Reserve spends on its own stimulus program. Abe also set a 2% inflation target—orthodoxy in many developed countries, but ambitious for Japan, which has suffered persistent (if mild) deflation for 15 years. The BOJ, which attained independence from political interference later than most central banks, now seems again firmly under political control: Abe appointed his own governor, Haruhiko Kuroda, to do his bidding.

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Recognizing that neither America’s Federal Reserve nor the European Central Bank had yet managed to spark meaningful recovery through monetary stimulus alone, Abe has increased fiscal spending—his second arrow. Come April he’s set to increase the country’s sales tax to 8%, from 5% presently—part of his pledge to eliminate Japan’s yawning deficits.

The most important elements of Abe’s plan, and also the most difficult, involve changing the very structure of Japan’s economy. Abe plans to open it further by, for example, participating in Trans-Pacific Partnership negotiations. He wants more women to enter the workforce, and seeks to cajole Japan’s male-dominant corporations to promote more women into senior positions. (Their labour participation is among the lowest seen in developed countries.) Work on this, the “third arrow,” has barely begun, and the policy prescriptions are often vague.

Overall, the initial results are encouraging. The yen fell against major currencies ahead of Abe’s victory, and remained lower. Major Japanese exporters appeared to benefit, although the country’s trade deficit persists. Japan’s consumer price index has jumped to 0.6% on an annualized basis—nowhere near the BOJ’s target, but a substantial improvement nonetheless. The latest stats show modest economic growth (an annualized 1.9%) that beat most expectations. There are also signs of life in the real estate markets of Japan’s largest cities. Most striking, Japan’s stock market rose sharply; the Nikkei 225 gained more than 70% in little more than a year. The resulting “wealth effect” should increase willingness on the part of Japanese investors to spend. “The first phase of Abenomics—aimed at improving confidence and jump-starting the economy—has gone well,” said Anoop Singh, director of the International Monetary Fund’s Asia and Pacific department, at a recent conference assessing its impact.

With his political brand so closely intertwined with these policies, Abe has benefited greatly. His cabinet enjoys an extraordinary 63% approval rating, according to a recent telephone survey by Kyodo News. This in itself is remarkable: none of the five Japanese leaders who served between Abe’s two terms lasted more than a year in office.

The long-term implications of Abenomics remain unclear. Observers wonder how far Abe can debase the yen before other countries—particularly Japan’s Asian neighbours—respond in kind. While proponents of Abenomics hope competitors will perceive a strengthening of the Japanese economy (the world’s third-largest) as being in their own best interest, this is by no means assured. “Japan has fired the first real shot in what future historians will record as the most significant global currency war since the 1930s,” predicted commentator John Mauldin. “Other countries will increasingly feel forced to respond.”

Abe courts danger in numerous other ways. Next year’s sales tax rise could easily depress domestic demand—which was exactly what happened in 1997 when that was last attempted. Now approaching 250%, Japan’s debt-to-GDP ratio is by far the highest among major industrialized countries. The country continues to borrow cheaply for the time being, in part thanks to falling prices—deflation in effect supplements return on Japanese bonds. Yet even a modest increase in interest payments could derail Abenomics entirely. To extend Abe’s archery metaphor, his bow could snap at any time.

Any effort to stoke the Japanese economy leans into the great headwind of the country’s aging demographics. Abe himself acknowledged as much in an interview with Foreign Affairs earlier this year. “This is the last chance for us,” he said, “and the sense of urgency is therefore enormous.”

Abenomics will also be watched closely outside Japan. A few short years ago it was said that “we are all Keynesians,” but that moment has given way to an era of austerity as countries struggle with the fallout of the financial crisis and their responses to it. By bucking that trend, Abe has already achieved heroic status among prominent Keynesian economists like Paul Krugman and Joseph Stiglitz. The outcome of Japan’s great experiment could influence policy-makers for years to come.



Winners and losers in Iran’s nuke deal

In late November, negotiators announced a historic—though provisional— deal to begin a partial dismantling of Iran’s nuclear weapons program. In exchange, the West will start lifting sanctions that have seriously damaged Iran’s economy. It’s good news for many, but not everyone.

Hassan Rouhani

Hassan Rouhani

The Iranian president managed to secure concessions on the sanctions that have hammered the regime economically. The preliminary deal could release up to $7 billion in energy revenue and other payments frozen under the current sanctions. And he got the deal without having to give up nuclear enrichment altogether.

Benjamin Netanyahu

Benjamin Netanyahu

Israel’s prime minister called the deal a “historic mistake.” The Israeli government mostly had to watch in horror from the sidelines as this deal was hammered out, raising doubts about how much influence Israel can count on in future from its traditional American allies.

Barack Obama

Barack Obama

The U.S. president welcomed a win—even an imperfect one—on the Middle East file. Though he may have to fight some congressional factions that are opposed to any and all negotiation with Iran, the public seems positive on the deal. Further, the prospect of looser export rules for Iran has already put downward pressure on oil prices.


The Republicans

Party poopers

The Tea Party–backed government shutdown pushed the GOP’s approval rating down to its lowest level ever. Time to get back to its business-friendly roots

John Boehner

“We have to get something out of this,” Indiana Republican congressman Marlin Stutzman told the press during the U.S. government shutdown in October. “And I don’t know what that even is.”

The Democrats could hardly contain their glee. Democratic Senate Majority Leader Harry Reid had the quote turned into a poster. Having forced the federal government to shut down because they blocked a bill authorizing normal spending, the GOP seemed not to remember why they’d done it.

There was, in fact, a motive—it just wasn’t shared by the whole party. Despite the fact that there was no real chance of derailing Obamacare, the point, Tea Party Texas Sen. Ted Cruz obliquely suggested in a magazine interview, was fighting the good fight, which would spread the gospel of small government and win over more American hearts and minds. That may have been the plan of the Tea Partiers, but it decisively backfired: by the end of the shutdown, the party’s approval rating was the lowest it’s ever been.

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It’s not the first time the Tea Party browbeat the rest of the GOP into that kind of strategy. The anti-tax movement accounts for only about 20% of Republican-held seats in the House, and just above 5% in the Senate. But it has been casting a far longer shadow than its congressional stature would dictate by threatening to run primary opponents against unco-operative Republican lawmakers.

The Tea Partiers’ ultra-conservative message appeals to true believers—a shrinking pool of working-class white men—but it doesn’t resonate among independents, women, minorities or even many Republicans (25% of whom say they dislike their own party).

Perhaps, however, the party has finally hit bottom. The latest fiscal crisis scare has shaken the business community. The U.S. Chamber of Commerce, for instance, threw its weight behind the Democrat in Virginia’s latest gubernatorial race. It might be the shock the party needs to sober up.

In the meantime, the implementation of Obamacare has been a fiasco of the White House’s own making—most notably its expensive and non-functional health-insurance marketplace website. That Democrat-made mess is striking less than a year before the November 2014 mid-term elections. Republicans will try to get something out of that situation too. They might even figure out what it is.