There are still times when Germans must be reminded of history's lessons.

One of those came after the Sept. 11 attacks, when a courageous Chancellor Gerhard Schroeder risked a no-confidence vote to take German combat troops to Afghanistan. His argument: History's obligation wasn't pacifism, as many argued, but a willingness to shed blood against new despots and terror.

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U.S. treasury secretary, Henry Paulson

The cost of faltering American leadership is growing as quickly as you can say Bear Stearns.

And the stakes in the U.S. election campaign increase with every dismal twist of the economic cycle.

Much of what we are watching feels like an emerging-market meltdown to top international financiers: runaway debt, a declining currency, imploding markets, failing political leadership and the urgent need for outside intervention to provide emergency stability.

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President Dmitry Medvedev

Russia's presidential vote Sunday poses a dilemma for Western leaders and American presidential candidates Hillary Clinton, John McCain and Barack Obama. Is it better to condemn the rigged elections or embrace the victor in hopes of encouraging a more cooperative Kremlin?

Answer: Hold your nose with one hand and extend the other to Dmitry Medvedev, who will win because Vladimir Putin has arranged it to be so. Putin will abide by his two-term constitutional limit and leave the presidency, but he is trying to remain Russia's most influential player by reinventing himself as prime minister.

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British Prime Minister Gordon Brown shares a joke with Senator Barack Obama

Hillary Clinton, John McCain and Barack Obama were all that Europeans wanted to talk about in the hallways and at the dinners of the annual Munich Conference on Security Policy over the weekend.

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Hamid Karzai

NATO is winning most battles in Afghanistan, but the international community is losing the war.That has consequences far beyond Afghanistan if the U.S., Europe and its friends don't change course fast. The dangers include deepening of regional instability that engulfs nuclear- tipped Pakistan, spreading global terrorism and the declining relevance of the North Atlantic Treaty Organization, the most- effective security alliance we have.

So as the U.S. enters a crucial phase in the process of picking presidential candidates, voters should think about which nominee would have the skills to deal with a distant place like Afghanistan. When the U.S. beauty contest is over, the winner will fail in office if he or she can't manage the sorts of challenges posed by Afghanistan.

The country defies military solution, yet needs more skilled soldiers and civilian rebuilders. It necessitates both urgent action and long-term commitment -- in this case, at least 10 years. The job can't be done without regional solutions, but that requires dealing with a hostile Iran and providing tougher love to allied leaders such as Pakistan's Pervez Musharraf and Afghanistan's Hamid Karzai, whose reluctance to tackle the most pressing of their problems stands in the way of success.

It will also take enormous diplomatic skill to forge consensus under a United Nations high commissioner to make sense of the disjointed relief and reconstruction work. There are 60 countries working inside the country, including some 37 that are providing troops.

Narco-Economy Grows

U.S. Secretary of State Condoleezza Rice is in London this week meeting with U.K. Prime Minister Gordon Brown and Foreign Secretary David Miliband trying to find a new candidate for super-envoy to coordinate the efforts after Karzai vetoed Paddy Ashdown, a man whose skills were proven in the Balkans.

Meanwhile, Karzai's failing reach throughout the country, rampant official corruption and insufficient international resolve has left Afghanistan with a dysfunctional judicial system and police force. That makes it all but impossible to stop the spreading narco-economy that fuels the reinvigorated insurgency.

There is some good news: Afghanis have put into place one of the most progressive constitutions in the Islamic world. More than 10 million people have voted in the nation's free presidential elections, and 2 million girls who until recently were banned from schools are now getting an education. It is also encouraging that the foreign troops operating in Afghanistan were invited and remain popular with most Afghanis, a striking exception in the country's history.

Terror Transfers

Yet the situation is worsening. Afghanistan now accounts for 93 percent of the world's opium production, and the illicit- drug industry makes up some 40 percent of Afghanistan's $8 billion economy.

Suicide bombings and the use of improvised explosive devices have soared, underscoring a probable transfer of technology and tactics from Iraq to Afghanistan. The Taliban has regrouped and re-energized after a period of weakness up to 2005, forming what Admiral Michael Mullen, the chairman of the Joint Chiefs, has called a ``classic growing insurgency.''

Meanwhile, allied countries dither over the number of troops they will send and what they would be allowed to do. Defense ministers will meet in Lithuania this week to consider an appeal to add 7,500 soldiers to the 40,000 already there. Canada is threatening to pull out 2,500 troops if they don't get reinforcements, and the U.S. wants Germany to send additional forces to the restive south from their safer northern bases.

A new report by the Atlantic Council (the organization I run) was one of three introduced in Congress last week by Democratic Senator John Kerry and Republican Senator Norm Coleman, underscoring an emerging bipartisan consensus.

Civilians Needed

First, the report sizes up what's needed for corrective action, stressing that the situation won't wait for a new administration.

Second, the international community, which is doing so much for Karzai, must insist on a super-envoy to coordinate efforts in Afghanistan. NATO will suffer if Afghanistan fails, but only civilian efforts can bring success.

What must follow is a comprehensive plan of military and civilian steps under this individual -- including a regional conference that includes India, Iran, Pakistan and even the Shanghai Cooperation Organization, of which Russia and China are members, bringing that organization into its first talks with NATO. Without that, we can't deal with Pakistan's terrorist breeding grounds or cut off border routes for the drug trade.

The priority within that plan must be a stepped-up counter- narcotics effort. There is no perfect fix, but any plan will require the Afghan government and the international community to embrace an approach that combines development and enforcement.

`Classic Mistake'

In some regions, it may make sense to buy the crop. In others, where cooperation is lacking, eradication could be the right approach. In all cases, one has to target distributors and laboratories and clean up the courts and police.

Kerry put it best last week: ``Today we risk repeating the classic mistake that dooms many counterinsurgencies: a failure to appreciate the difference between tactical success and a winning strategy. The fatal consequence, all too familiar to those of us who lived through Vietnam, is that you can win every battle, but fail to win the war.''

 

Frederick Kempe is president and CEO of the Atlantic CouncilOriginally published 5 February 2008 by  Bloomberg News. Reprinted with permission.

Soverign Wealth Funds

It's good and bad that the issue of sovereign wealth funds has entered the U.S. presidential debate.

What's positive is that the candidates have the chance to educate the American electorate during a moment of mounting economic gloom -- and while people are paying attention -- about the increased role that foreign capital plays in creating U.S. jobs and growth.

While they are at it, the candidates might also tell voters that without SWF investments of almost $70 billion in financial institutions over the past few weeks the banking crisis, stock- market retreat and risk of recession would be much worse.

Unfortunately, the bad side of SWFs entering the electoral debate is more likely: a further spread of ill-informed, protectionist populism that wins votes and boosts television ratings, but doesn't wake up Americans to the greater danger that these funds might shun U.S. markets.

``The U.S. can benefit from these flows generally and in regard to financial institutions at the moment in particular,'' says Robert M. Kimmitt, the deputy secretary of the Treasury. He says the benefit of SWFs is ``they have been patient, long-term investors who are essentially placing a bet now even though the expected return will come in a number of years.''

For the uninitiated, SWFs, of which there are about 40, are giant pools of capital controlled by governments and invested in private markets. For all the attention they get, they are just one of four sovereign investment sources that include international currency reserves, state-owned enterprises and public-pension funds.

Growth Rate

It's their growth curve that has won global attention, and they are poised to quadruple in value from $3 trillion now to $12 trillion by 2015, equal to the capitalization of the Standard & Poor's 500 Index. Morgan Stanley predicts the funds will have assets of $28 trillion by 2022, more than double the size of the U.S. economy today. That ensures their investment decisions will move markets and shape the financial system.

An important article by Treasury's Kimmitt in the newest issue of Foreign Affairs lays out a policy approach that boils down to this: voluntary multilateral agreements that ensure the West resists protectionism while the SWFs get more transparent and don't let politics drive their investments.

Such a reasonable approach won't be easy in a political season.

`Hat in Hand'

In last week's U.S. Democratic presidential debate, moderator Brian Williams of the NBC Nightly News put his question this way to Senator Hillary Clinton: ``Citigroup and Merrill Lynch have both gone overseas, as some put it, hat in hand, looking for $20 billion in investment to stay afloat.'' He noted the potential saviors included Saudi Prince Alwaleed bin Talal, whose money former New York Mayor Rudolph Giuliani turned down after Sept. 11. ``Does this strike you as fundamentally wrong, that much foreign ownership of American flagship brands?'' he asked.

In his follow-up question to John Edwards he noted that one of those bailing out U.S. banks was the Kuwaiti government, ``afloat itself today, as you know, thanks to the blood, sweat and tears of American soldiers.'' It was as if he were suggesting Kuwait, in return for U.S. intervention that rescued the country from Saddam Hussein in 1991, should invest somewhere other than America.

The three candidates explained that SWF growth resulted from high energy prices and Asian trade surpluses, but then dodged any helpful ideas for dealing with the results.

Multiplying Problems

What they should have said was:

-- Our economic problems will multiply without foreign investment and our continued openness toward it. International purchases of Treasuries not only help finance our national debt, but foreign-owned businesses employ some 5 percent of the U.S. workforce and account for almost 6 percent of output, 20 percent of U.S. exports, and 10 percent of all U.S. investment in plant and equipment. Beyond that, overseas companies pay wages 30 percent higher on average than their U.S. counterparts.

-- SWFs are another sign of the dramatic structural shift sweeping the global economy that we can shape but not reverse. The U.S. share of world output will continue to decline, as will its portion of annual global growth. And that's for the best as billions of people embrace capitalism and global markets. If we can keep attracting foreign capital and access global markets, we'll continue to lead.

-- We still must press for global policy responses to avoid abuse. Unilateral action won't work, whether by us or our European friends. We should push for voluntary multilateral agreements that already are in the works.

Drafting Rules

For countries receiving foreign government-controlled investment, the Organization for Economic Cooperation and Development is working to codify best practices that would keep the West's investment regimes open while treating all investors equally.

The International Monetary Fund, with help from the World Bank, is drafting a best practices regimen for SWFs that would increase transparency, accountability and public disclosure. ``Even long-standing SWFs are aware that the increase in the number and size of these funds has, rightly or wrongly, raised reputational issues for them,'' Kimmitt says.

It's a simple deal, really: The West resists protectionist temptations and the new SWFs resist political ones. Executing it will be the hard part, and U.S. presidential politics probably won't help.

 

Frederick Kempe is president and CEO of the Atlantic CouncilOriginally published 22 January 2008 by  Bloomberg News. Reprinted with permission.

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