Yesterday, in commenting on the eurozone crisis, Barack Obama said the two words all political scientists hate to see: 

"Europe is wealthy enough that there's no reason why they can't solve this problem," Obama told reporters at the White House.

"If they muster the political will, they have the capacity to settle markets down, make sure that they are acting responsibly and that governments like Italy are able to finance their debt." (emphasis added)

By and large, political scientists hate the concept of political will.  As I've said numerous times on the blog, "political will" is usually tantamount to saying, "if only politicians would completely ignore short-term political incentives and do the right thing!"  Or, to put a finer point on it, "if only politicians stopped acting like politicians!"  Because we as a profession tend to focus on structural forces and immutable preferences, "leadership" as a variable often (though not always) falls by the wayside. 

Looking at the latest EU summit/eurozone machinations, however, I'm beginning to wonder if we need to think about "first image" explanations for what just happened.  As the Wall Street Journal, Felix Salmon, Financial Times, Paul Krugman,  and Economist are all reporting, it was pretty friggin' disastrous.  Salmon provides the most complete autopsy -- here's a snippet: 

[A]nother half-baked solution is exactly what we got. Which means, I fear, that it is now, officially, too late to save the Eur ozone: the collapse of the entire edifice is now not a matter of if but rather of when.

For one thing, fracture is being built into today’s deal: rather than find something acceptable to all 27 members of the European Union, the deal being done is getting negotiated only between the 17 members of the Euro zone. Where does that leave EU members like Britain which don’t use the euro? Out in the cold, with no leverage. If the UK doesn’t want to help save the euro — and, by all accounts, it doesn’t — then that in and of itself makes the task much more difficult.

But that’s just the beginning of the failures we’re seeing from European leaders right now. It seems that German chancellor Angela Merkel is insisting on a fully-fledged treaty change — something there simply isn’t time for, and which the electorates of nearly all European countries would dismiss out of hand. Europe, whatever its other faults, is still a democracy, and it’s clear that any deal is going to be hugely unpopular among most of Europe’s population. There’s simply no chance that a new treaty will get the unanimous ratification it needs, and in the mean time the EU’s crisis-management tools are just not up to dealing with the magnitude of the current crisis.

The fundamental problem is that there isn’t enough money to go around. The current bailout fund, the European Financial Stability Facility, is barely big enough to cope with Greece; it doesn’t have a chance of being able to bail out a big economy like Italy or Spain. So it needs to beef up: it needs to be able to borrow money from the one entity which is actually capable of printing money, the European Central Bank.

But the ECB’s president, Mario Draghi, has made it clear that’s not going to happen. Draghi is nominally Italian but in reality one of the stateless European technocratic elite: a former vice chairman and managing director of Goldman Sachs, he’s perfectly comfortable delivering Italy the bad news that he’s not going to lend her the money she needs. He’s very reluctant to lend it directly, he won’t lend it to the EFSF, and he won’t lend it to the IMF. Draghi has his instructions, and he’s sticking to them — even if doing so means the end of the euro zone as we know it.

So, what explains this mess -- the inexorable structural problems of the European Union, or the lack of political leadership?  At this point, I'm genuinely uncertain.  For example, the facile explanation for British Prime Minister David Cameron's rejection of an EU treaty is catering to his domestic interests -- namely the British financial sector.  Then, however, we get to this bit from the Economist: 

After much studied vagueness on his part about Britain's objectives, Mr Cameron's demand came down to a protocol that would ensure Britain would be given a veto on financial-services regulation (see PDF copy here. The British government has become convinced that the European Commission, usually a bastion of liberalism in Europe, has been issuing regulations hostile to the City of London under the influence of its French single-market commissioner, Michel Barnier. And yet strangely, given the accusation that Brussels was taking aim at the heart of the British economy, almost all of the new rules issued so far have been passed with British approval (albeit after much bitter backroom fighting). Tactically, too, it seemed odd to make a stand in defence of the financiers that politicians, both in Britain and across the rest of European, prefer to denounce....

Britain may assume it will benefit from extra business for the City, should the euro zone ever pass a financial-transaction tax. But what if the new club starts imposing financial regulations among the 17 euro-zone members, or the 23 members of the euro-plus pact? That could begin to force euro-denominated transactions into the euro zone, say Paris or Frankfurt. Britain would, surely, have had more influence had the countries of the euro zone remained under an EU-wide system.

As for Merkel, well, my take on her leadership style has been documented already.  She's dealing with an opposition that is castigating her for not taking swifter and more drastic action to resolve the eurocrisis.  In response, she's pushing for changes that will take months, if ever, to accomplish -- and, if they are accomplished, have no guarantee of actually solving the problem.  It doesn't seem like the eurozone has that time. 

As for Draghi, well, one could attribute his range of half-hearted measures to his excessively cautious leadership -- after all the ECB is an ostensibly independent institution, so presumably Dragh has the greatest amount of autonomy.  It's not that simple, however -- Draghi wouldn't have been selected as the new ECB head unless he demonstrated the kind of policy traits that made him acceptable to Germany in the first place.  Oddly enough, although Draghi currently has the most freedom of action, the structures that ensured he would become the new ECB head ensured he would be the least likely person to exploit that freedom. 

So, stepping back, there appears to be a role for the quality of political leadership as an explanatory factor for the current eurozone crisis.  Properly defining that role, however, is beyond the capacity of this blog post. 

What do you think? 

Hey, remember when about ten days ago I blogged that things were getting so bad in Europe that it was legitimate to bring up the 1930's?  What's happened since that seemingly hyperbolic warning? 

As Felix Salmon blogged earlier this week, the European banking system is headed towards a full-blown liquidity crisis.  Yields on Spanish and Italian debt are hovering around the 7% mark, which was the tipping point that forced Greece, Ireland and Portugal to seek assistance from the European Financial Stability Facility and the IMF.  Multiple European countries, including France, have had difficulty completing bond auctions this week.   

So it would seem that the European Central Bank needs to do something.  The New York Times, Wall Street Journal, and Financial Times all have lead stories today pointing out the enormous pressures that are being put on the European Central Bank this week.  We'll excerpt the non-gated NYT story to set things up: 

Only the fiercely conservative stewards of the European Central Bank have the firepower to intervene aggressively in the markets with essentially unlimited resources. But the bank itself, and its most important member state, Germany, have steadfastly resisted letting it take up the mantle of lender of last resort....

At issue is whether the bank has the will — or the legal foundation — to become a European version of the Federal Reserve in the United States, with a license to print money in whatever quantity it considers necessary to ensure the smooth functioning of markets and, if needed, to essentially bail out countries that are members of the euro zone.

Traditionally, and according to its charter, the European bank has viewed its role in much narrower terms, as a guardian of the value of the euro with a mission to prevent inflation. But as market unease has spread over the past two years, critics say the bank’s obsession with what they say is a phantom threat of inflation has stifled growth and helped bring the euro zone to the edge of a financial precipice.

With events threatening to spin out of control, the burden now rests on Mario Draghi, an inflation fighter in the president’s job at the bank barely two weeks who surprised many economists by immediately cutting interest rates a quarter point.

This morning, however, in his first speech as the head of the ECB, Draghi pivoted and redirected the pressure back at the politicial stewards of the EU:

National economic policies are equally responsible for restoring and maintaining financial stability. Solid public finances and structural reforms – which lay the basis for competitiveness, sustainable growth and job creation – are two of the essential elements.

But in the euro area there is a third essential element for financial stability and that must be rooted in a much more robust economic governance of the union going forward. In the first place now, it implies the urgent implementation of the European Council and Summit decisions. We are more than one and a half years after the summit that launched the EFSF as part of a financial support package amounting to 750 billion euros or one trillion dollars; we are four months after the summit that decided to make the full EFSF guarantee volume available; and we are four weeks after the summit that agreed on leveraging of the resources by a factor of up to four or five and that declared the EFSF would be fully operational and that all its tools will be used in an effective way to ensure financial stability in the euro area. Where is the implementation of these long-standing decisions?

The truly scary thing is that, given the state of the Italian and Spanish bond markets, even the full EFSF won't be enough to calm markets down. 

And so the pressure gets redirected back to Germany, as the most powerful actor in the ECB and EU.  As Matthias Matthijs and Mark Blyth explain in Foreign Affairs, however, Germany has not been reading its Charles Kindleberger:

In order to guarantee the strength of any international economic system, Kindleberger explained, a stabilizer -- only one stabilizer -- needs to provide five public goods: a market for distress goods (goods that cannot find a buyer), countercyclical long-term lending, stable exchange rates, macroeconomic policy coordination, and real lending of last resort during financial crises. The United States did not supply these things in the 1930s. Germany fails the test on all five items today.

First, rather than providing peripheral countries with a market for their distress goods, the Germans have been enthusiastically selling their manufactured goods to the periphery. According to Eurostat, Germany's trade surplus with the rest of the EU grew from 46.4 billion euro in 2000 to 126.5 billion in 2007. The evolution of Germany's bilateral trade surpluses with the Mediterranean countries is especially revealing. Between 2000 and 2007, Greece's annual trade deficit with Germany grew from 3 billion euro to 5.5 billion, Italy's doubled, from 9.6 billion to 19.6 billion, Spain's almost tripled, from 11 billion to 27.2 billion, and Portugal's quadrupled, from 1 billion to 4.2 billion. Between 2001 and 2009, moreover, Germany saw its final total consumption fall from 78.5 percent of GDP to 74.5 percent. Its gross savings rate increased from less than 19 percent of GDP to almost 26 percent over the same period.

Second, instead of countercyclical lending, German lending to the eurozone has been pro-cyclical. Indirectly (through buying bonds) and directly (by spreading its exchange rate through the euro), the country has basically given the periphery the money to buy its goods. During the economic boom of 2003-2008, Germany extended credit on a massive scale to the eurozone's Mediterranean countries. Frankfurt did quite well for itself. "European Financial Linkages," a recent IMF working paper, reveals that in 2008, Germany was one of the two biggest net creditors within the eurozone (after France). Its positive positions were exact mirrors of Portugal, Greece, Italy, and Spain's negative ones. Of course, as the financial crisis began to escalate in 2009, Germany abruptly closed its wallet. Now Europe's periphery needs long-term loans more than ever, but Germany's enthusiasm for extending credit seems to have collapsed.

And what about the third public good, stable exchange rates? By definition, the euro gives the countries that choose to join it a common external float, the credibility that comes with banking in a potential global reserve asset, and the credit rating of its strongest member. This is both true and where the problems begin. At the core of the eurozone lies a belief that, if countries adhere to a set of rules about how much debt, deficit, and inflation they can have, their economies will converge, and the same exchange rate will work for all members. This is true in theory, but only so long as countries obey the rules. And, despite being the author of many of those rules, Germany showed a singular lack of leadership and responsibility when it came to following them. When it broke the Stability and Growth Pact (SGP) in 2003, it sent the signal to the smaller countries that fiscal profligacy would go unpunished. The result was heightened public sector borrowing and increased public spending. Germany's enthusiastic lending to the periphery only exacerbated the problem.

Fourth, economic health requires the stabilizer to coordinate macroeconomic policy within the system. In this domain, Germany failed spectacularly, by insisting that the rest of the world follow its peculiar ordoliberal economic philosophy of export-oriented growth. By ignoring long-established ideas such as the Keynesian "paradox of thrift" or the "fallacy of composition," Germany is advocating a serious dose of austerity in the European periphery without even a hint of offsetting those negative economic effects with stimulus or inflationary policies at home. German growth, after all, was partially fueled by demand in Southern Europe (made possible by excess German savings). By the iron logic of the balance of payments, one country's exports are another country's imports and one country's capital inflows are another's capital outflows. So, the eurozone as a whole cannot become more like Germany. Germany could only be like Germany because the others countries were not. Insisting on ordoliberal convergence is guaranteed to produce economic instability, not stability.

Finally, Kindleberger would want Germany -- or, rather, the ECB, which is dominated by Germany -- to act as a lender of last resort by providing liquidity during the current crisis. Germany instead insisted on IMF conditionality for the bailout countries and on severe fiscal austerity measures in exchange for limited liquidity, thus failing Kindleberger's final test. The most obvious example is German obstinacy against letting the ECB play the role that the Federal Reserve played in the United States in 2008 and 2009. By lending heavily, the Fed was able to arrest the United States' slide into despair. Only a couple of days ago, Jens Weidmann, the president of Germany's powerful Bundesbank, flat-out rejected the idea of using the ECB as "lender of last resort" for governments, warning that such steps "would add to instability by violating European law." It is hard to see how yet one more violation of European code will add significantly to the already horrendous levels of instability, when brushing democracy aside is considered good for the euro.

It looks as if there's a plan in the works for the ECB to do a legal end-around by loaning money to the IMF and then having the Fund loan to the GIIPS economies.  If that happens, however, it won't be announced until next month.  And the way credit markets are playing out right now, I'm not sure the eurozone has that much time.

Now is usually the point in the post at which the instinct to provide some sweeping narrative about the state of the eurozone -- a la David Brooks -- is very compelling.  What's the point, however?  The eurozone is in contagion mode right now, which means it doesn't matter which countries were virtuous and which countries weren't during the last decade of binge borrowing.  They're all on the same sinking ship, and the Merkel Algorithm seems to be playing out again. 

Developing.... in a way that truly scares the living crap out of me. 

My latest Bloggingheads diavlog is with NSN's Heather Hurlburt.  We discuss Greece, Palestinian recognition, and the state of the foreign policy debate among the GOP 2012 candidates. 

Given those topics, be warned:  I might have been liberal in my use of profanity in the diavlog below.

Enjoy!

[NOTE:  the following reads much better if you read it using the voice of Rod Serling!--ed.]

There's a subtle art to reading broadsheet American journalism.  Reporters strain for objectivity, and in the process, strain to avoid anything that smacks of the prejorative.  If you squint real hard at the text, however, you can occasionally detect moments when the reporter is dying, just dying, to state their blunt opinion on the matter at hand. 

I bring this up because Liz Alderman of the New York Times, in her story on the possibility of a big deal in Europe to enlarge the European Financial Stability Facility, appears to be ever-so-subtly banging her head against her keyboard: 

The rally in American stock markets was set off by a report late Tuesday on the Web site of The Guardian, a British newspaper, that France and Germany had agreed to increase the size of the rescue fund — the European Financial Stability Facility — to as much as 2 trillion euros to contain the crisis and backstop Europe’s banks. But almost as soon as those hopes soared, European officials quickly brought them back to earth, with denials flooding forth from Brussels, Paris and Berlin.

This latest round of rumors and rebuttals about a European solution was a repeat of earlier situations. Such episodes have played out several times since the debt crisis intensified this year. Most recently, investors have been pegging hopes on a meeting of Europe’s leaders set for this coming Sunday in Brussels, anticipating that a comprehensive solution to the debt crisis might be unveiled (emphasis added).

Ms. Alderman has filed more than one story this week on this theme -- and she's hardly the only writer stuck in this rut. 

It would appear that Ms. Alderman has discovered that there is a fifth dimension of reporting, beyond that which is known to ordinary economic journalism. It is a dimension as vast as developed country sovereign debt and as timeless as currency itself. It is the middle ground between austerity and stimulus, between national sovereignty and supranational authority, and it lies between the pit of man's fears and the summit of his knowledge. This is the dimension of European political economy. It is an area which we call... the eurozone. 

Ms. Alderman is clearly yet another victim of.... the Merkel Algorithm.  And all I can say is, welcome to the club, Liz.  Welcome to the club. 

When I woke up this morning and scanned the headlines, I knew what I was going to blog about -- the stories in the press about how the European Union was, after much hemming and hawing, beginning to move towards a closer fiscal union.  I was then going to not-so-humblebrag about my own prediction that this would indeed happen. This was all going to be a great set-up to the last-minute reverse course -- i.e., this Financial Times op-ed by German Finance Minister Wolfgang Schäuble in which he declared his "unease when some politicians and economists call on the eurozone to take a sudden leap into fiscal union and joint liability." 

Here's the thing, however -- if you read my eurozone blog post from this past February, you'll see that almost the exact same dynamic played itself out six months ago.  This time the Germans are pre-emptively balking before the peripheral countries can balk in response to German calls for austerity... but you get the general idea. 

So... in the interest of avoiding IPE déjà vu for readers, I hereby promise not to blog about this again until something actually happens beyond news reports of preliminary steps-towards-fiscal-centralization-followed-by-political-pushback.  I will simply observe that Ryan Avent's basic question will be the one to ask going forward: 

Europe's leaders know what they'll have to do to stabilise the situation. The key question now is: what is the set of euro-zone countries consistent with the political will to save the currency area? Europeans in Europe's core will share a currency with "outsider" countries, but they won't fight to save them. So who are the outsiders? Who has to go to convince core voters that the cost of saving the euro zone is worth bearing?....

With which countries do core voters sufficiently identify themselves as to make a large, ongoing commitment acceptable? Answer that, and you probably have a good idea how this mess will end.

Readers are requested to state which countries get the Euroboot in the comments below. 

Your humble blogger is taking a brief break from teaching and zombie book-whoring publicizing recently-released research to start work on new research.  This requires me to be in Europe for the week.  So, for some local color, it's worth asking how things are in the land of the euro, the eurozone, and the eurocracy. 

Last year, during the epth of the Greek crisis, I argued that, "When going backwards isn't an option, and muddling through is no longer viable, the only thing left to do is move further along the integration project." 

Last week, it seemed that France and Germany had come to the same conclusion.  The Guardian's John Palmer provided a cogent summary on the deal that was being negotiated at Friday's European leaders' summit:

Angela Merkel, Nicolas Sarkozy and the other EU chiefs will sound out the parameters of a breakthrough deal which could take the euro area – at the heart of the EU – towards a de facto economic government. The deal will offer massive financial support for countries under the currency market cosh in return for governments accepting that national economic policy in future will first have to secure the broad approval of the rest of the euro area.

[You must be feeling sooooo vindicated right now!!--ed.]  Oh, you betcha, got this one right on the money... wait, what's this Financial Times story by Peggy Hollinger and Peter Spiegel saying? 

New cracks emerged at a summit of European leaders on Friday, as the prime ministers of several countries raised strong objections to a Franco-German plan that would commit all 17 users of the single currency to co-ordinating their economic policies....

[T]heir initiative triggered a backlash from other European Union leaders anxious to defend their national economic, labour and welfare policies.

In the summit’s concluding communiqué, European leaders also appeared to back off a commitment to give the eurozone’s €440bn bail-out fund new tools to help shore up struggling “peripheral” economies.

An initial version of the conclusions committed the EU to giving the fund more “flexibility” – a code word for new authorities such as buying sovereign bonds of struggling countries on the open market. After extensive debate, that language was taken out, however, and now only binds members to give the fund “necessary effectiveness”, a clear watering-down.

What happened?  The Wall Street Journal's Irwin Stelzer explains:

Most countries profess broad agreement of the need for reforms along the lines Germany is demanding. Yet when confronted with the German-French package—the French have always favored some form of centralized economic management of the EU, including strict regulation and heavy taxation of the financial services sector that is centered in Britain—they balked.

Austria, with one of the lowest effective retirement ages in the euro zone, won't go along with an increase in the retirement age. Portugal won't buy into the end of wage indexation with inflation because it wants to offer a sop to public-sector workers whose wages have been cut by 5%. Neither will Belgium, Spain and Luxembourg. All in all, almost 20 countries at Friday's EU summit objected to the Germanization of their countries for one reason or another. So Germany refused to sign on to an increase in the size of the euro-zone bailout fund. "It was truly a surreal summit," commented Yves Leterme, Belgium's prime minister.

Stezler goes on to predict that there will be yet more Euro-muddling as a result of this deadlock.  I'm sticking to my original prediction, however.  As much as the European periphery dislikes the proposed grand bargain, some form of it will likely be accepted because  the alternative outcomes seem even more unappetizing. 

Developing....

Last week I predicted that, contrary to expectaions, the Greek crisis would force the European Union to abandon their "muddling through" approach to security regulation volcanoes everything under the sun economic policy and start some serious centralization.  Not that this was a great option -- but all the other options were even less palatable. 

So, did the weekend package confirm my hunch?  Well, Anne Applebaum seems to think so: 

Though the European Union has always required a partial surrender of sovereignty from its member states, Greece no longer has much sovereignty at all. IMF agreements also impose conditions, but the language is somewhat different: The indebted country requests help, the IMF responds. In this case, the EU has decided what Greece "shall" do. I don't believe anybody knew that the EU had so much power over its member states, least of all the Greeks.

Well, yes, but on the overall question of the centralization of eurozone decision-making, I think the weekend's events actually prove me wrong.   Indeed, this New York Times story by Steven Erlanger, Katrin Bennhold, and David Sanger suggests that the member states have managed to come up with yet a new way to muddle through without arrogating power to the Commission: 

Germany was insisting on a solution that involved bilateral loans from European member states, similar to the much smaller Greek bailout agreed to a week earlier. But countries like Italy and Spain feared that they would be unable to raise the amounts required and lobbied for loan guarantees on funds raised by the European Commission.

As the evening unfolded, Germany, Britain and the Netherlands all opposed the commission’s proposal to raise money on capital markets guaranteed by member states. The British and Dutch said the proposal was tantamount to giving a “blank check” to the European Union’s governing commission, according to a European diplomat who spoke on condition of anonymity.

Near midnight Sunday night, the talks appeared deadlocked, these participants said. “The deal is exploding,” read the text message of one French official to Paris, where Mr. Sarkozy was demanding regular updates and was pushing for a bigger agreement.

Then came the deal-making idea — put together, according to different officials from different countries, by the French, the Italians, the Dutch and a crucial German banker.

Axel Weber, the president of the conservative Bundesbank, who is favored to succeed Jean-Claude Trichet as the next president of the European Central Bank, suggested a mechanism for Europewide loan guarantees that finally won support from a reluctant German government during a midnight call, participants said.

The idea was for a new mechanism euphemistically called “a special purpose vehicle” — essentially eurobonds created by intergovernmental agreement among euro zone countries. That vehicle, supposedly to last only three years, would raise up to 440 billion euros on the markets with loans and loan guarantees, depending on the need.

The Germans, together with other northern Europeans like the Dutch, British and Austrians, insisted that the European Commission not control the vehicle but only manage it — in conjunction, as with the Greek deal, with the International Monetary Fund. The fund would provide discipline, as well as roughly one euro for every two from Europe.

The “special purpose vehicle” finally broke the French-German deadlock.

Yeah, about that special purpose vehicle:

[F]or all the excitement about the scale of the effort, it is important to remember that the core fund does not now exist. The fund, known as a special purpose vehicle, would raise money by issuing debt and making loans to support ailing economies. The European countries would guarantee that fund.

So the package is merely a commitment for the vehicle to borrow money if a large economy like Spain, which represents 12 percent of the output in the euro zone, asks for assistance. The International Monetary Fund is pledging 250 billion euros to support the effort. Sixty billion euros under an existing lending program pushes the total to near $1 trillion.

The fund is therefore more a theoretical construct than the Troubled Asset Relief Program that was created in the United States, and that is where things get tricky.

By definition, if Spain came to a point where it could no longer finance itself, interest rates would be on the rise. The several hundred billion euros for the fund would not only come at a high cost, but would bring additional pain to already indebted countries like Portugal, France, Italy and the United Kingdom, which back the special purpose entity, thus compounding the region’s debt woes.

So, in other words, because Germany and others don't want to transfer either real power or real ability to borrow to the European Commission, the result is a jerry-rigged bailout fund that has some disturbing dynamics if things go further south.    

We'll see how the markets respond in the coming days and months.  For everyone's sake, I hope I'm wrong and the EU can muddle through.  But my fear is that this strategy is not going to be viable for that much longer. 

Following up on my dollar post from earlier this week, I see that Paul Krugman is talking a related issue in his New York Times column today -- the refusal of the renminbi to depreciate against the dollar:

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

Krugman then goes on to excoriate the U.S. Treasury department for not upbraiding the Chinese more on this. 

Fair enough, but the thing is, the United States is not the country that's hurt the most by this tactic.  It's the rest of the world -- particularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy.  These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means their products are less competitive in the U.S. market compared to domestic production and Chinese exports. 

This leads to the title of this post.  Krugman presumes that the U.S. has the strongest incentive to talk to China about this issue.  If one thinks of the U.S. acting as the hegemon, that's possibly true.  As a matter of direct economic interest, however, why haven't the Europeans and East Asians been screaming bloody murder about this?  China's policies are forcing them to take actions they don't want to take -- so why aren't they complaining more loudly about this? 

Why?