The President Hits the Ground Running

Editor’s Note: This article was originally published in the December 2012 edition of Longitude, a monthly Italian publication on world affairs.

As their enthusiasm following the reelection of Barack Obama to the White House settles down, his closest advisors have begun to zero in on the items that the president’s international economic agenda will have to focus on during his second term. These include Europe and China above all.

Those end goals are, in some ways, similar to those pursued during Obama’s first term in office, yet the White House’s level of urgency and assertiveness may shift as a result of the developments (or lack thereof ) in the domestic agenda.

The president is focusing his recently-acquired political capital on addressing the so-called “fiscal cliff,” a precipitous mix of tax increases and expenditure cuts that, failing any agreement with Congress, will automatically kick in as of January 2013. Their effect would be that of slashing the deficit by 4 percentage points, but in so doing, they would erode the economic recovery now finally gaining steam in the United States.

While this is the most urgent issue for Obama’s administration, it is not necessarily the most important one. This year, the U.S. government is running a 9% deficit, which the IMF projects will drop to 7% next year. Meanwhile, the debt-to-GDP ratio will have escalated from 67% in 2006 to an expected 112% next year. In absolute values, this is the fourth consecutive year that the U.S. is running a deficit of over a trillion dollars, with the public debt stock already surpassing the $16 trillion threshold.

In his first term, President Obama gave priority to the objective of short-term stabilization of the economy, with the aim to ensure a faster turn-around, not to mention avoid a generalized fall-out. But his administration focused little on securing a medium-term consolidation path, partly because it may have conflicted with the previous objective of encouraging a short-term pick-up in demand.

Looking forward, a medium-term strategy is likely to become the priority of the Obama administration in the second term – which will eventually shape the U.S. tactical position on a range of international issues, from the euro area crisis to the relationship with China. The aim is to first stabilize its largest exports market where Europe is concerned, and then to try and increase its penetration in China, given the potential to do so. This is needed so that a stable – and, ideally, a rising – foreign demand for U.S. products will, to the extent possible, shield the economy from the compression of domestic demand resulting from the inevitable fiscal consolidation.

In his first term, the president’s position on the eurozone crisis was analogous to his administration’s attitude towards China. He acknowledged, mostly in private, some differences with the Europeans, in particular with Germany, but carefully avoided stressing this difference in public, and, rather, worked incessantly behind closed doors to urge his counterparts towards a solution he could welcome. 

For instance, he turned the G-8 Summit at Camp David last May into the culmination of a long-standing strategy to put pressure on the German Chancellor Angela Merkel to adopt a more balanced approach, one centered on fiscal consolidation but also on enhancing growth prospects.

Along similar lines, his administration has always looked with great concern at statements soliciting a Greek exit from the eurozone, worrying that an uncontrolled breach there would trigger a meltdown in larger, but highly vulnerable, countries like Italy and Spain.

It is emblematic that one of the first sentences of that Summit communiqué reads: “We agree on the importance of a strong and cohesive eurozone for global stability and recovery, and we affirm our interest in Greece remaining in the eurozone.”

From the U.S. standpoint, a Greek exit would immediately raise the stakes and broaden geopolitical implications. A disorderly exit from the eurozone might be the prelude to an exit from NATO, where Greece has never concealed the fact that it does not feel adequately protected from its Turkish neighbor. This would be even more likely if Russia were to turn up in the guise of White Knight to help Greece with its inevitably difficult transition. The mere possibility of Russia solidifying its presence in the heart of the Mediterranean Sea is a scenario that neither the US nor Western Europe would be keen to consider.

Thus, the soft approach that characterized Obama’s first term vis-à-vis the eurozone crisis may evolve and become more firm as domestic stakes increase. In this scenario, his administration will have to escalate pressures on Germany to support a stable resolution of the Greek crisis. At the same time, they will have to urge Germany to adopt a more constructive and balanced approach between austerity and growth.

With regard to China, the administration has geared efforts towards improving communication with counterparts in Beijing, while remaining aware of existing areas of disagreement. The 2010 White House National Security Strategy captures effectively the thrust of this position: “We will not agree on every issue, and we will be candid on our human rights concerns and areas where we differ. But disagreements should not prevent cooperation on issues of mutual interest, because a pragmatic and effective relationship between the United States and China is essential to address the major challenges of the 21st century.”

Only in 2011, total U.S.-China trade stood at $503 billion, with China ranking as the second largest trading partner of the U.S. (after Canada) and its third largest export market. With this in mind, on January 19, 2011, President Obama said at the official arrival ceremony during his state visit to China: “At a time when some doubt the benefits of cooperation between the United States and China, this visit is also a chance to demonstrate a simple truth. We have an enormous stake in each other’s success. In an interconnected world, in a global economy, nations – including our own – will be more prosperous and more secure when we work together.” This is exactly what the just-reconfirmed administration will do in its second term – only, this time, knowing full well that an effective relationship with China is more vital than ever.