Breakingviews

U.S. payroll tax fight shows faux fiscal restraint

By Daniel Indiviglio The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The fight over U.S. payroll taxes just became exhibit A in political style over substance. Republicans in Congress, who have pounded the table on deficit reduction since last summer’s bruising debt battle, have backed down on a demand that spending be slashed to cover the cost of extending the tax cut. To let it ride for another 10 months will cost $100 billion. So much for fiscal discipline.

It was bad enough when legislators leaned on seized mortgage backers Fannie Mae and Freddie Mac last December to enable 160 million American workers to keep paying a rate of 4.2 percent of their wages, instead of 6.2 percent, into the Social Security fund for a couple of extra months. Now, it’s about to get worse.

Last year, when Republicans refused to raise the nation’s debt ceiling unless future deficits were shrunk, it led to a “super-committee” tasked with finding a way to lop off at least $1.2 trillion from future deficits. The group, predictably, failed. Instead, $1 trillion was automatically cut – a figure that dips to $900 billion if the payroll tax cut is extended.

It’s easy to write this off as election-year politics, but that would neglect the deeper dogma at work. The GOP pledge not to raise taxes obviously trumps any rhetoric around the deficits that have been averaging $1.3 trillion for four years running.

Of course, the Democrats aren’t acting any more responsibly. They’re happy to extend the payroll-tax cut without paying for it, too. And though willing to slash some spending elsewhere, Barack Obama’s party is still unwilling to tackle the real problem: safety-net programs. This was evidenced most recently by the president’s budget plan on Monday.

Despite losing its AAA credit rating, the United States isn’t in any real trouble yet. Its debt held by the public is about 70 percent of GDP – well below Greece’s 160 percent. But America’s ratio is also nearly double what it was just four years ago. The payroll tax fight only goes to show just how little political will there is in Washington, just as in many other capital cities around the world, to seriously address the problem.

Dreamworks’ China deal won’t be access all areas

By Wei Gu The author is a Reuters Breakingviews columnist. The opinions expressed are her own

Dreamworks may soon get an exclusive ticket to China’s closely guarded film industry. The U.S. studio is likely to announce a joint venture with China-based investors during Vice President Xi Jinping’s visit to California on Feb. 17, a person familiar with the situation has told Breakingviews. It should be a good deal for the creators of “Kung Fu Panda”, but does little to lower the Great Wall around film distribution in the People’s Republic.

Movies remain a heavily restricted industry in China. Only 20 foreign films a year can be screened nationally at cinemas, and those must be shown through a designated state-owned intermediary. Beijing said it would comply with World Trade Organisation rules on media by March 2011. But progress on books, newspapers, journals, DVDs and music hasn’t yet followed through to cinema or TV. Only this week China’s broadcast regulator banned foreign shows during prime time.

Joint ventures might get Hollywood closer to China’s giant audiences. By producing in China, Dreamworks can bypass the restrictions on foreign content. The venture will see up to $2 billion investment in the next five years, according to Caijing magazine, more than half likely to come from Chinese partners including China Media Capital and China Development Bank. Dreamworks should get low-cost local talent and wider exposure.

But the deal has political appeal too. Xi Jinping can claim the joint venture as evidence that China is creating a more open market during his closely-watched U.S. trip. And China can pick up animation techniques and merchandise promotion skills from Dreamworks. Meanwhile, more movies in the vein of “Kung Fu Panda” might help Beijing extend its “soft power” around the world.

The deal isn’t perfect by any means. Dreamworks will get only partial control. For movies other than cartoons and China-related family films, the doors may still be shut, and Dreamworks will also have to tolerate Beijing’s restrictions on content and intellectual property regime. Still, even a back-row seat in China’s $2 billion-a-year movie industry should be enough to get Hollywood’s producers feeling animated.

Chaos in Greece is not just a Greek problem

By Pierre Briançon and Neil Unmack

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

The Greek parliament has approved yet another austerity package. The governments of the euro zone and investors around the world can just about pretend that all is now well. The agreement on Greek reforms, which opens the way for a package of private creditor concessions and new public money, is supposed to bring the country’s debt back to a sustainable level. But this is little more than wishful thinking. European leaders are sighing with cowardly relief, hoping that they have finally insulated themselves from the Greek problem.

In a way they have. The Greek vote capped a few weeks of gradual easing of tensions in the euro zone’s other fiscally-challenged countries. Yields on Spanish and Italian debt have come down to almost bearable levels. Even Portuguese yields, which spiked at the end of January on fears the country was headed down the Greek path, have dropped by 3 percentage points this month.

But Greece and Europe are still a long way from safety. Athens is rioting while the country’s political leaders are devoting their energy to expelling from their ranks the MPs who dared vote against the austerity plan. This lays bare Greece’s main problem: the inability of any government to implement its decisions. There is something pathetic in the creditors’ insistence on new government programmes and reforms while they acknowledge the absence of a properly functioning state machine to implement them.

If there is no contagion, the conventional wisdom is that the euro zone could take the pain of a disorderly Greek default or a unilateral exit from the euro zone. The Greek economy is tiny, private creditors won’t have much more to lose after the current deal, and banks are being restructured. But there will still be some 150 billion euros worth of public loans and, if Athens were to leave the zone, the eurosystem’s 109 billion euro exposure to the Greek central bank. That’s without counting the adverse impact of the latest austerity plans.

The euro zone, as always, is buying time. It should make sure it uses that time to help pull Greece out of its current death spiral.

IMF offers best way for China to save Europe

By Wayne Arnold

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Beijing will almost certainly say it wants to see the euro zone survive at their joint summit on Feb. 14. If so, it should pony up – not by lending directly, but via the International Monetary Fund’s $1 trillion rescue package. That way China not only has a better chance of getting paid back, but may also win a bigger role at the world’s currency watchdog.

Europe is China’s top trading partner and Beijing already parks part of its $3.2 trillion of foreign exchange reserves in the continent’s bonds. But buying bonds from distressed euro members like Greece looks too risky. Direct loans, or asset purchases, may anger nationalists on both sides. For Beijing, it would be hard to justify a poor country like China bailing out a relatively rich one like Greece.

Contributing to the IMF’s proposed bailout fund makes more sense. Based on its relative weight at the IMF, China might put up $60 billion. Europe would provide $500 billion, and there would be strings, notably that the IMF be paid back before other creditors. Best of all, just the idea might calm down markets so much that the money itself never needs to be lent.

China still has to sell its public on bailing out Europe through a predominantly rich-country club. An agreement by IMF members in late 2010 to increase voting rights from developing economies left China, representing roughly nine percent of global GDP, with only about six percent of the vote.

How the IMF is run may seem unimportant to China, with its closed capital account and vast reserves. But China is bit-by-bit internationalising its currency and opening to currency flows. Moreover, most of China’s trade is still denominated in dollars, which leaves it exposed to U.S. monetary policy. China considers the IMF the best counterbalance to such tides. Helping fund Europe’s bailout, and getting a bigger say at the watchdog in the process, is a no-brainer.

Obama and Xi may make unhappy Valentines

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Valentine’s Day summit between Xi Jinping and Barack Obama could make for uncomfortable viewing. China’s likely next president is due to meet the U.S. leader in Washington – as his predecessor did 10 years ago. Only this time the stakes are higher. Obama, facing a November election, is under pressure to talk tough. Xi is under pressure to stay cool, while appeasing hardliners back home.

When Hu Jintao visited George W. Bush a decade ago, Sino-U.S. relations were strained. Taiwan, and the crashing of a U.S. surveillance plane in Chinese airspace, loomed large. But the war on terror created a common purpose. Aside from congresswoman Nancy Pelosi’s attempt to hand Hu a wad of letters about Tibet, the visit was unremarkable.

Three things are different now. Trade, supposed to be another common purpose, has created new tensions. China has failed to open key markets, and still restricts exports of strategic commodities. Obama, desperate to create jobs, has threatened tough action against nations like China which suppress their currencies to promote trade. It’s also a popular theme with his potential Republican opponents, even though U.S. firms and consumers are big beneficiaries of China’s cheap labour.

Second, military tensions are back. America is returning troops to the Pacific, where China has low-level territorial disputes with just about everyone. And Beijing is more openly critical of U.S. interventionism. It refuses to condemn Syria’s human rights abuses, and vacillates over American sanctions on Iran. These topics vex the masses on both sides.

Then there’s Xi, who seems more three-dimensional than the taciturn Hu. He loves Hollywood; his wife is a glamorous military folk singer, and his father a famed revolutionary. Xi has already broken the mould by criticising judgmental “foreigners with full bellies” on a Mexican visit in 2009. Some personality may be beneficial: Hu’s indecipherability has only widened the Sino-U.S. trust deficit.

New Petrobras CEO needs to flex political muscle

By Kevin Allison and Christopher Swann

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

So much for the honeymoon in Rio. Maria das Graças Foster’s confirmation as the new chief executive of Brazil’s Petrobras on Thursday was followed almost immediately by a dismal set of fourth-quarter results. Foster, a company veteran, has her work cut out to get the state-controlled energy behemoth back on track. Petrobras’ biggest problems are more political than operational, and her engineering skills alone won’t solve them.

Rising operating costs, a big refining loss and a 675 million reais ($391 million) impairment charge on unspecified assets battered fourth-quarter profit down 52 percent from a year earlier. Despite better production volumes and higher oil prices, net income was scarcely more than half what analysts expected.

Part of the problem is Petrobras’ need for speed. Private investors and the government are united in wanting the firm to unearth Brazil’s deep-sea oil as quickly as possible. But that makes it hard to keep costs under control. Only this week Petrobras broke oil industry records by agreeing to pay $76.3 billion to lease 26 offshore rigs for 15 years. Investments of this magnitude are enough to put upward pressure on prices globally.

Higher salaries in Brazil’s hot economy are also biting, as is slowing production from the company’s older Campos Basin fields, which matter to Petrobras at least until the more exciting pre-salt deepwater build-out is completed. Aside from focusing on drilling efficiency, there is little Foster can do to tackle such problems.

Downstream challenges look stubborn in a different way. Big losses in the refining business were due largely to government caps on how much Petrobras can charge for gasoline and diesel. This won’t yield to Foster’s professional expertise, either.

Pennsylvania sells out cheaply in fracking fight

By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Pennsylvania is selling out cheaply in the fight against fracking. The Keystone State, the nucleus of national opposition to the deep-drilling technique, is poised to levy a gas tax, ostensibly to cover drilling damages. The charge may soften the hostility. But the levy is less than half that of other states, suggesting the industry still has the upper hand.

Hydraulic fracturing is blamed for many ills, from water contamination to minor earthquakes. Many of the claims look exaggerated, though the controversial practice takes an undeniable toll on gas-rich areas. Disposing of drilling fluids strains water treatment facilities. To properly monitor the activity requires extra inspectors. And the army of heavy trucks needed to transport fracking equipment exacts extensive damage. The cost of such wear and tear to motorways was estimated to be about $450 million in Arkansas alone by the state’s authorities.

Most gas-producing states have long imposed taxes to offset some of these costs. Pennsylvania has been the last big holdout. It helps explain why the state has been at the vanguard of national objection to fracking. The roughly $200 million the state’s new tax proposal would generate annually – much of which is to be passed onto affected communities – may convince protesters to lay down their placards.

Still, it’s a poor Faustian bargain. The effective rate of the new tax will fluctuate between 1.2 percent and 2.5 percent of production, about a third what Texas extracts and roughly a quarter the peak rates in Louisiana. Proposals by Pennsylvania Democrats for a stiffer levy would have produced twice as much revenue, potentially mitigating painful spending cuts. Aside from short-changing Pennsylvanians, the new deal will limit the ability of local communities to restrict drilling.

Over the past decade, gas drillers have spent close to $750 million on campaign contributions and lobbying in the Keystone State, according to the activist group Common Cause. The latest pact suggests the money was well spent. Drillers must be hoping the comparatively light tax will be just enough to calm discontent, at least for a while. But the industry shouldn’t necessarily expect Pennsylvania’s anti-fracking brigade to be placated for good.

Harsh IMF approach courts disaster in Romania

By Martin Hutchinson and Christopher Swann

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

The IMF is courting disaster in Romania. The fund’s draconian conditions led Bucharest to cut public sector wages by 25 percent, far more than elsewhere. Now Romania’s prime minister Emil Boc has resigned and anti-reform forces have been emboldened. Excessive IMF rigour could do lasting harm.

The fund has been trying to soften its fearsome reputation. Managing Director Christine Lagarde has argued that the IMF should be less harsh, admitting that “consolidating too quickly can hurt the recovery and worsen job prospects.”

Sadly, in its treatment of Romania the IMF lived up to its old blood-sucking reputation. The lender’s demands included 100,000 job cuts, as well as steep cuts in salaries and a hefty rise in VAT, which hits the poor directly. Such harsh measures may prove self-defeating. By strengthening anti-market political forces, the IMF may end up pushing Romania away from the policies it encourages.

Romania does not obviously need extreme measures. While its current account deficit reached 14.5 percent of GDP in 2007 (less than Latvia, Bulgaria and Estonia), it has alleviated the problem with a 30 percent devaluation of the leu in 2007-09. Its public spending at 36 percent of GDP is not excessive.

Crude fiscal austerity fails to address Romania’s endemic corruption and other structural economic problems, which help keep the country’s GDP per person the second lowest in the EU. The IMF could help the country deal with the dreadful legacies of the odious Ceausescu regime. Instead, its harshness risks undermining Romania’s fragile democracy – street protests helped bring the government down.

Still a long slog ahead for U.S. jobs

By Daniel Indiviglio and Richard Beales

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

There’s still a long slog ahead for the unemployed in America. Jobs growth has started picking up. But even at a rate of 250,000 a month, a hair above January’s figure, full employment may not be reached until 2020. A new Breakingviews calculator shows how a faster or slower rate of job creation changes that picture.

The important headline variable is the jobs growth reported in the U.S. monthly employment report – the stronger, the better. But a few other factors also matter when looking ahead. One is population growth, and another is how quickly the labor participation rate increases toward a more typical level. That’s the percentage of the population defined as either working or looking for work.

Since the recent recession began, millions of workers have become discouraged and temporarily given up on finding a job. The labor participation rate has declined from 66.4 percent in 2007 to 63.7 percent in January. Suppose participation recovers to that 2007 level by January 2020. This trend coupled with population growth at the average rate seen between 2003 and January this year would call for almost 200,000 new jobs a month just to hold the unemployment rate – 8.3 percent as of January – steady.

Then there’s the question of what level of joblessness reflects, essentially, full employment, since there will always be people between jobs. The calculator allows this input, as well as the other key ones, to be changed, but starts out assuming that 5 percent unemployment is the target.

With these assumptions, full employment would only be reached again in America in early 2020. If the monthly job creation rate jumped to 300,000, that date would be brought forward nearly four years.

China has moral high ground over “dirty skies”

John Foley The author is a Reuters Breakingviews columnist. The opinions expressed are his own

China is fighting for its right to pollute. The government has banned Chinese airlines from paying a pointless new European emissions tax. The argument isn’t really about the environment. It’s about China’s “don’t intervene” foreign policy, which also led it to veto a U.N. resolution against Syrian President Bashar al-Assad on Feb. 4. This time China has the moral high ground.

China’s view is simple: stay out of our business and we’ll stay out of yours. It explains a tolerance for unsavoury regimes in Syria or Sudan. Beijing has used its Security Council veto only a handful of times since 1971, when it took over from Taiwan. But in the eyes of rich countries which accept in a “duty to protect”, even occasional non-intervention looks callous. China blocked U.N. moves against regimes in Myanmar and Zimbabwe, and abstained on anti-Taliban measures in 2000.

The EU’s new airline pollution tax is a new riff on that theme. From Jan. 1, airlines landing or taking off in European airports must pay for the CO2 they emit for their entire flight. So a flight from Beijing to London must pay the EU for gases it emits over Kazakhstan, Mongolia and even China. From a Chinese perspective – and an American or Indian one – that looks like intervention in other countries’ affairs.

In this case, Beijing looks about right. True, the EU tax punishes a British airline flying from London to Shanghai as much a Chinese one. But it unilaterally makes airlines pay EU member-states for something that happens above other countries. In effect, the Europeans are claiming sovereign rights over foreign skies. Regardless of China’s weak record on global warming action, or the possibility of lost orders for Airbus, the EU should yield on principle.

Chinese principles may yet be modified for the sake of global harmony. Beijing’s says its airlines can’t pay the tax “without official permission”, leaving space for negotiations. But as China gets richer and more powerful, other countries will have to pay more attention to its view of sovereign rights. The “dirty skies” row shows that’s not always a bad thing.