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I apologize for the light posting of late. I've been preoccupied with some pretty heavy work-related stuff. But I want to devote much of this week to the developing eurozone crisis. A backgrounder will follow shortly, but to give you an idea of how serious the situation in Europe is, traders have taken over $8bn in short positions against the euro, the largest bet ever against the common currency.

That's massive, almost equal to the $10bn bet against sterling made by George Soros that 'broke' the bank of England in 1992 and ejected sterling from the European Exchange-Rate Mechanism.

The euro was supposed to be one of the big winners of the financial crisis; for the 'safety' it provided countries like Slovakia, for the credible external commitment its accession criteria provided countries like Hungary and Poland, and for its rise as a viable reserve alternative to the dollar. But all of the sudden the euro is confronted with its biggest crisis and I sense that policymakers will soon encounter a stark choice: explicitly back countries like Greece and Portugal or eject them from the common currency.

Stay tuned.

After a busy busy week, I am happy to get back to the blog today and hit on a few points I missed while drowning in Excel hell...

-Hot off the presses: US GDP surged a whopping 5.7% in Q4 2009, the best quarter in over six years, and driven by companies ramping up production to overcome thin inventories amid rising consumer demand. Consumer spending, which accounts for over 2/3 of US economic activity, expanded by a better-than-expected 2%. I'm not even going to make a comment about a job-less recovery, as these are really strong numbers, unless I just did...

-Bernanke wins reappointment, which Simon Johnson believes is the beginning of the end for financial reform. While I disagree (though I imagine the difference in our expectations is only a matter of degree), Johnson's post is great on the strength of the following sentence:

And now we can look back over 20 years and be honest with ourselves: Alan Greenspan contends for the title of most disastrous economic policy maker in the recent history of the world

The FT's profile this weekend of Jim O'Neill, the Goldman Sachs economist who coined the now ubiquitous acronym 'BRICS,' got me thinking about one of my main objectives for IPE Journal: a dedicated focus on the 'rise of the rest.' In looking back over the history of my posts, I realized that the financial crisis, perhaps inevitably, distracted me from this emphasis as my coverage became far more US-centric than I anticipated or desired. That is partly a reflection of the US' role in the crisis and the overwhelming media coverage of the US financial sector over the past year, partly my own engrained anglo-saxon bias in choice of literature and media outlets, and partly a recognition that the majority of our readers are in fact based in North America.

But the pace with which countries like China, Brazil and Indonesia have emerged from the Great Recession has crystalized the importance of the emerging economies to not just my own worldview, but I suspect those of our readers as well. So the following links represent a shift back to the emerging markets and issues that are likely to play a defining role in the years ahead. That is not to say my coverage of US banks or Gordon Brown will cease entirely, but expect a much smaller role for Lord Mandy in the months ahead. This is, after all, a blog on International Political Economy. But I do love Mandelson.

-Via Free Exchange, The Economist looks at a McKinsey study on deleveraging that partly demonstrates why the big emerging markets have emerged far quicker from the crisis than the major economies (Russia aside). If you follow the links to the actual article, I found it interesting that when viewed through the prism of crises, countries like the US and Spain currently look a lot like emerging markets have historically in the aftermath of such episodes.

-China finally takes its foot off the gas by raising reserve requirements on lenders and reimposing a sales tax on certain home sales, fearing that the economy is overheating (asset bubbles and inflation). Conventional wisdom six months ago held that China was likely to allow a gradual depreciation of the renminbi to export its way out of the economic slowdown. Six months later, is a gradual appreciation more likely in 2010?

-A constitutional crisis looms in Nigeria, threatening a recovery in oil output and social/political stability.

-Chile continues the resurgence of the right in the Americas. With Venezuela plunging quite literally into darkness and (hyper)inflation, the 'Bolivarian Revolution' that swept the region looks less-than-promising ten years on.

-Finally, and contrary to the first link, the future may be bright for the emerging economies, but are investors touched by a bit of irrational enthusiasm at the moment?

In looking back at the past decade, most commentators have forfeited any meaningful narrative in favor of the proverbial 'better luck next time.' But if the following trends are taken in toto, the past decade in the markets looks downright revolutionary:

-The S&P500 fell 24%, its worst performance since the 1930s, FTSE down 7.3%, DJIA down 9.3%, Nikkei down a massive 44% over the past ten years. Contrast that with the major emerging markets: Russia's Micex index hit the moon with an astounding 802% rise, Brazil's Bovespa jumped 301%, India's Sensex rose 249% and the Shanghai Composite closed 140% higher.

-The benchmark Nymex crude oil contract ended the decade up 210%, but the story in between is among the most volatile in memory. Oil closed out 1999 at $25.60 a barrel, hit $147.27 in July 2008 and ended 2009 at $79.36.

-Spot gold closed the decade up 281%, while copper ended 290% higher.

-Two major stories in the currency markets: the dollar's long decline and the euro's rise to viability. The dollar ended the decade down 23.5% on a trade weighted basis, while the euro gained 43% on the dollar.

So what can we extrapolate from the data above? The 'rise of the rest' is the defining trend of the past decade; loose monetary policy contributed to a great capital flight from developed market equities; the dollar's long relative decline has eroded the US' influence internationally and will shape the coming decade as much as any other trend (politically, financially and economically); emerging market industrialization made commodities a really, really good bet; and precious metals retained their mystical aura in uncertain times.

“The Americans get the toys, the Chinese get the Treasuries and we get screwed.”

-Should the IMF embrace Brazil's imposition of (selective) capital controls? These two think so. Also, FT Alphaville had a good analysis of the decision (I realize we are a bit late on this.)

-Nouriel Roubini takes aim at the 'mother of all carry-trades.'

-Is the democratization of FX trading a good thing? Or is it really just another hustle?

Barry Eichengreen, the reliably even-handed Berkeley prof, has written an article arguing that the future of the US dollar is not nearly as grim as some would have you believe:

"The blogosphere is abuzz with reports of the dollar’s looming demise."

With posts like this one, Barry? Onwards:

"The first thing to say about this is that one should be sceptical about economists’ predictions, especially those concerning the near term. Our models are, to put it bluntly, useless for predicting currency movements over a few weeks or months.... Over periods of several years, our models do better. Over those time horizons, the emphasis on the need for the US to export more and on the greater difficulty the economy will have in attracting foreign capital are on the mark. These factors give good grounds for expecting further dollar weakness. The question is, Weakness against what?"

This is precisely the point that one of our readers brought up when I discussed this issue a couple of weeks ago (see? we read your comments). The argument goes like this: the dollar is weakening, but so are the currencies of all other major economies due to stimulus packages and mounting government debt. If you are going to abandon the dollar, you need to switch to something else. Barry dismisses the likelihood of the USD being replaced by the euro or yen, and points out that China will not be ready to introduce the remnibi as a viable alternative for quite some time.

Nor is inflation a plausible threat right now, either: despite what some shrill voices may be saying, the Federal Reserve is still determined (and credible) in its fight against inflation.

So without an alternative currency to the dollar, there's nowhere to go. Aha! that is where gold comes in, right? Not so fast, says Nouriel Roubini in a recent interview:

"I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies.... The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense."

I think that these are all important counter-arguments to those inclined to write the dollar's obituary. My earlier post suggested that the evidence pointed to a long-run decline in the dollar - and that argument still holds. But for the short term? I leave the last word to Prof. Eichengreen:

"For the moment, the patient is stable, external symptoms notwithstanding. But there will be grounds for worry if he doesn’t commit to a healthier lifestyle."

The Fed chief has sounded the alarm and echoed my comments on global imbalances, saying it was 'extraordinarily urgent' that the US and Asia implement policies to combat the return to old habits. For the US, this includes a sustainable and credible fiscal consolidation, and for Asia, a shift away from export-led growth and greater exchange-rate flexibility.

The G20 summit in Pittsburgh produced a consensus that, while complacency is dangerous and risks remain, the worst of the financial crisis/global recession has passed us by. So, what's next?

-World Bank President Robert Zoellick on life after the storm.

-Marko Dimitrijevic argues that the term 'emerging markets' is obsolete; the rising giants have arrived.

-Quickly shift your gaze from Germany to Ireland, where a hugely important re-do will affect Europe for decades to come.

-A sterling slide is good for Britain.

-Is China the developed world's new engine of growth?

- Wired has a fascinating article on the attempt by one man to create an alternative currency using the internet: E-Gold. Although E-Gold has failed (due largely to its attracting the attention of unsavoury types, and subsequently the FBI), this story raises all sorts of interesting questions about what money actually is, and whether national/supranational bodies are going to be able to maintain their control over the currency we use in day-to-day transactions.

- Nouriel Roubini analyzes Latvia's economic troubles, drawing parallels with Argentina's default in 2001. He writes: "At this point, a currency and financial crisis is pretty much unavoidable." Who cares? you might ask. But there are also strong parallels with Thailand's situation leading into the East Asian financial crisis which began in 1997. Only this time it is Europe's fragile economies that are on the line.

- Raging against bad statistics: Buiter on the costs of smoking and Ben Goldacre on the costs of illegal downloading.

-Last week, Michael Skapinker wrote a piece in the FT entitled 'Britain's years of progress were no illusion.' It remembers 1970s Britain and asks us to retain a little perspective on the tremendous progress of the past three decades (in Britain and beyond).

-The NYT looks at the likely response of the US credit card industry to regulatory reform.

-Brazil and China will begin using their own currencies in official trade transactions, accelerating an intended shift away from the dollar by two of the world's (emerging) economic powers.

-How the Russian military (and pop stars?) sees the country's energy diplomacy with Europe, set to song and dance. Funny, and frighteningly true.

-Say it aint so, Arsene.

Politique
-G20 finance ministers begin a tense weekend in the south of England amidst deep divisions over the way forward.

-The US deploys a warship to the South China Sea following a maritime incident between an unarmed US surveillance boat and five Chinese naval vessels, Wen Jiabao bangs the drum on US Treasuries...and these two things are related (see how things tie together so nicely?)

-Pakistan is on the verge of: a) another military coup, b) an unlikely political compromise, c) utter collapse.

Economia
-Switzerland moved to devalue the franc, raising fears of a "currency war" (i.e. competitive devaluations). It also reluctantly agreed to reform its bank secrecy laws and increase its cooperation on tax evasion.

-Reuters had an interesting report on the unusually sharp dissent within the US Federal Reserve over the bank's actions in response to the crisis.

-Bernard Madoff plead guilty to 11 charges related to his $50bn ponzi scheme, including securities fraud, mail fraud, money laundering and perjury. Sentencing is June 16.

The Rest
-Santino the chimpanzee has led scientists to question whether premeditation is in fact a uniquely human trait.

-Benoit Faiveley visits the last Palestinian keffiyeh factory in Hebron for Monocle (side note- its ironic that an essentially protectionist peace is sponsored by UK Trade & Investment)

-Alexander Lobrano explores Paris v. New York Eating (hint: he misses NYC). He then turns the tables in New York v. Paris Eating (hint: he misses Paris).

Dave's ongoing coverage of the crisis in Central and Eastern Europe has highlighted not just the economic and political ramifications for the countries in turmoil, but the exposure of countries like Austria, Sweden and really all of Western Europe (the world if you ask Rogoff) to their problems. The weight of the crisis shouldn't be understated: it risks spurring rapid contagion, providing a political opening for the far-right (and Russia) in many countries and accelerating the moral collapse of capitalism's post-Berlin Wall workshop.

Yet not all is lost amidst the fear and uncertainty. A few developments provide hope that the crises will be met with an effective political response. The most immediate is a report by Alan Beattie of the FT that a group of multilateral institutions will announce on Friday a coordinated lending package of €25bn to the region's banks. This follows a report earlier this week that foreign banks were pumping cash into their subsidiaries in the region. The lending is key because the IMF simply lacks the resources to tackle the crisis on its own; it also masks the failures of Western European governments to follow through on anything but rhetorical promises of support. At the most basic level, however, an influx of Euros is desperately needed, and it looks like we are finally moving in the direction of a coordinated response.

The second promising development is more of a discussion than trend at this point. The merits and timing of Eurozone accession are hotly debated in the region (and Western European capitals). But it seems the attraction of the common currency's relative security has crystallized under the current crisis; Slovakia and Slovenia are perceived to be safe, for now, a feat many attribute to Euro membership. The Polish government has reportedly entered discussions for an accelerated accession to the ERM II (though, the Polish central bank was quick to temper those ambitions when it bluntly warned against joining the Euro too quickly). Even debate in the UK (I know, not in the region, just making a point) has started to discuss the merits of joining. Many, including us at IPE Journal, have opined on the threats posed to the common currency by the present crisis. But is it possible that the Euro could emerge from all the turmoil if not stronger, at least larger? Wolfgang Munchau and others argue its in fact preferable, a necessary step to stabilizing Central and Eastern Europe. But accession criteria, such as the ERM II timeframe and reference rate of inflation, would have to be scrapped (again, preferable).

On the political front, many of the governments in the region have demonstrated over the past week that they recognize the way out. In what should be held up as a lesson to the leaders of their western neighbors, the central banks of Poland, Hungary, Romania and the Czech Republic issued coordinated statements denouncing the currency instability and effectively pledging to defend their currencies. This intervention signalled to many a commitment to monetary discipline, affirmed by Hungary's decision to hold steady at 9.5%. Forward-rate contracts are now averaging in a 60 basis-point increase over the next three months. The choice is a stark one for the governments in the region: defend the currency or growth. Given the political pressure, defending the currency won't be an easy choice. But its the right one.

A final point- the countries in the region have tended to be lumped under the acronym CEE for Central and Eastern Europe (by myself included, just look above). It's rhetorically convenient, but many are calling it intellectually lazy (even irresponsible), and they have a point. Slovakia's circumstances are different than Hungary's, whose policy options may be different than the Czech Republic's. Dave rightfully noted this variance in his post above. Lumping these countries together not only fails to distinguish their relative circumstances, but risks indirectly stoking the contagion everyone hopes to avoid.

I discuss the devaluation of the rouble and Russia's deteriorating economy at zzzeitgeist. Check it out!

Politique
-US Vice President Joe Biden outlined the foreign policy vision of the young Obama administration in a speech at Munich. He called for a "reset" of US-Russian relations, offered Iran "meaningful incentives" to abandon its nuclear program, and called on America's allies (i.e. Europe/NATO) to shoulder a greater burden in security (Afghanistan, Guantanamo detainees). The speech comes days after Kyrgyzstan, under Kremlin pressure, announced it would close an American military base of great strategic importance. Russia embraced the "reset" concept.

-The US Senate reached a tentative deal on a $827 trillion stimulus package. After fierce political debate that all but shattered Obama's "post-partisan age", the Democrats appear to have picked off three Republican votes by cutting direct aid to states and localities and increasing the percentage of tax incentives in the bill (the bill cuts the size of the so-called 'middle-class tax cut' while increasing incentives to purchase homes and cars). Congress must now reconcile the House and Senate bills before a final package can be sent to Obama's desk.

-Morgan Tsvangirai returned to Zimbabwe to form a coalition government with Robert Mugabe. The president will sign a constitutional amendment allowing Tsvangirai to become prime minister, while a judge threw out treason charges against an important MDC figure.

-Abdul Qadeer Kahn, father of Pakistan's nuclear bomb and prolific nuclear proliferator, was freed from house arrest after 5 years. France and the US immediately criticized the move.

Economia
-The US unemployment rate hit 7.6% and GDP plummeted 3.6% in Q4 2008. According to The Economist, the fall would have been over 5% if not for a sharp rise in inventories. Elsewhere, German industrial output fell by a record 4.6% in December.

-The BoE cut rates to 1%, while the ECB held steady once again.

-Obama imposed a cap on executive compensation at companies receiving "exceptional assistance" from the US government. Politics 101: if you want to appeal to public anger, but have little intention of widely enforcing a rule, insert a vague definition like "exceptional assistance."

-The rouble floor announced by the Russian central bank was tested this week; traders are betting the floor was set too high; oil price and capital flows volatility will continue to weigh on the currency.

The Rest
-In the Prem, Torres fires Liverpool top of the table (for now), Chelsea are in free fall (bye bye Big Phil?), and Arsenal just suck. In Italy, Milan's initial formal offer for Becks was rejected outright by LA Galaxy.

-French street artist JR brought his "28 millimetres: Women" project to Kibera, Kenya. The artist imposes facial images on homes and buildings, providing an identity and voice to the women of one of Africa's largest slums.

-Over 84 people have been killed in Australia's deadliest fire disaster. The state of Victoria has been ravaged by the bushfires, fueled by a prolonged drought and soaring temperatures.

-Scientists have identified a key protein in the process by which the H5N1 virus replicates itself. It is hoped that the discovery will lead to more effective drugs to combat the virus. Egypt confirmed its second human case this year, while both Hong Kong and Vietnam announced new cases in birds.

Politique
-As the financial crisis rolls on, the next phase of government (re)action is developing: US House approves an $819bn stimulus package (with a certain provision we don't like very much) and the FT reports that Obama will unveil a "Big Bang" package of banking/financial/housing reforms this week (now next), Harper's minority government unveils a federal budget that includes the country's first fiscal deficit in over a decade, Merkel has reportedly settled on a plan to create government-backed "bad bank" vehicles to clean up balance sheets, and Aso unveiled his own stimulus package under considerable opposition (he also pledged $17bn in aid to other Asian nations).

-62% of Bolivian voters approved a new constitution in last Sunday's referendum. The new constitution increases the government's control over strategic industries (including natural resources), strengthens indigenous rights, and furthers land reform. Despite the popular majority, 4 of the country's 9 provinces voted against the changes.

-North Korea voided all political and military agreements with the South this week, as mounting tensions on the Korean peninsula threaten all out military conflict. While Kim's motivation is unclear, a few theories seem plausible: 1) he is pushing his way onto Obama's agenda, 2) he is provoking an international crisis to stem any internal revolt amid his ailing health, 3) he has lost control and hardliners are their authority over foreign policy.

-Social and political instability is spreading across Europe: Iceland's government fell, massive strikes paralyzed France, and British workers walked off the job to protest the use of foreign workers amid rising British unemployment. Nationalism, protectionism, and industrial action are all on the rise.

-Iraqis voted in provincial elections. Despite a lower than hoped turnout, the elections were peaceful.

Economia
-The IMF reduced its global GDP forecast for 2009 to 0.5%, and the global economy shed over 70,000 jobs in one day.

-Sterling had a small recovery this week on a slight confidence jump in UK banks, the Euro slipped amid eurozone economic weakness and lack of faith in the ECB, and the USD and Yen both endured "rollercoaster" weeks.

-Exxon Mobile reported record earnings for the 4th quarter. The Lex column in the FT praised the company for "generating free cash flows as others invested" during the good times, positioning itself to pick off rivals and acquire assets in the bad. This conservatism has acted as a hedge against the rapid fall in prices.

The Rest
-In the Prem, ManU go 2 clear with 1 in hand, Liverpool score 2 late to take all 3 from a 10-man Chelsea, and Arsenal throw up a big 0 at home against West Ham. Elsewhere, Becks scores his second for Milan as speculation mounts over his return to LA.

-In tennis, Nadal beat Federer in 5 for the Australian Open title. Rafa's performance was simply incredible, coming less than 48 hours after his Australian open record 5 hour, 14 minute semifinal match against fellow Spaniard Fernando Verdasco. Many took Federer's uncontrollable tears in the post-match ceremony as a sign that even the Swiss great doubted his ability to ever beat Nadal again in a major final and catch Sampras' record 14 major titles.

-In Olympic swimming, Oops!

-While much of the fashion world has been tailoring collections to reflect our dark economic times, these designers look to color.

-Move over Highlander, meet Turritopsis nutricula: immortal jellyfish.

Does it matter if an already worthless currency is abandoned?

Politique
-On Tuesday, Barack Obama became the 44th President of the United States. Or was it Wednesday? He swiftly moved to roll back the Bush years through executive orders on Guantanamo, interrogation, and foreign assistance. The President also named two high profile envoys to the middle east and south Asia, a signal that the State Department and America's "soft power" will lead US foreign policy.

-Israel completed its withdrawal from Gaza, days after both Israel and Hamas declared "unilateral" ceasefires. The death toll from the conflict is estimated at 1,300 Palestinians and 13 Israelis. In related news, the BBC came under intense pressure following its refusal to broadcast a Gaza aid appeal by the Disasters & Emergency Committee.

-The Prime Minister of Iceland, Geir Haarde, called a March general election and will not seek reelection. The Daily Mail (and many others) incorrectly labeled Haarde's government the "first in the world to be effectively brought down by the credit crunch." As Dave noted in December, Belgium's government was the first to fall under pressure directly stemming from the financial crisis.

Economia
-Negotiations over the US stimulus package intensified as Obama met with leaders from both parties to shape a consensus. The stimulus package will undoubtedly pass, but what will it look like: will it hit $1 trillion (many economists believe it must to be effective)? how large are the tax cuts (will Obama bend to his own party by limiting this political manoeuvre)? how many Republicans will ultimately be on board?

-Spain and Portugal were hit with downgrades this week, and the eurozone looks to be on the verge of a serious crisis of confidence. Following its second bail out of the banking sector and the Pound's sharp decline, is the UK in the firing line? Does Britain=Iceland?

-In a written statement to the Senate Finance Committee, US Treasury Secretary designate Timothy Geithner accused China of "manipulating" the renminbi. In a measured response, the Chinese government said Geithner's comments were "out of keeping with the facts", would undermine the global effort to combat the financial crisis, and could fuel protectionism. In other China news, year-on-year GDP growth slowed to 6.8% in the 4th quarter, the slowest pace in 7 years.

The Rest
-Holders Pompey crash out of the FA Cup, Arsenal are held at last year's finalists Cardiff City, and the Merseyside derby ends in a draw, setting up a 4th round replay. In other Prem news, Kaka's megadeal to Man City fell through and a Kuwaiti consortium's proposed takeover of Liverpool has reportedly collapsed.

-In other sporting news, the disturbing balkanization of grand slam tennis.

-Affirming Dave's "political economy theory of fashion", Milan fashion week reflected the economic downturn, with the suit notably absent from many collections.

-The 81st Academy Awards nominations were announced in Los Angeles. The Curious Case of Benjamin Button lead the pack with 13 nominations, followed by Slumdog Millionaire with 10.

-Blackberry addicts the world over are scrambling to get their hands on the "Barackberry", after the US President finally wins his battle to stay connected in the White House. The NSA-enhanced device will have two "modes": one for personal contact with a tiny group of family and friends, another for official communications with a small circle of advisors and officials.

Minutes after posting my look at sterling and the prospects for Britain joining the common currency (see below), Nick Clegg steps out and validates one half of my conclusion: the debate will seriously reemerge during 2009.

In an interview with the FT, the Lib Dem leader echoes the main conclusions of the "10 Years of the Euro: new perspectives for Britain" report, arguing that Britain must join the Euro to "salvage the public finances and prevent the 'permanent decline' of the city." He believes public opinion could swing violently in favor of the euro should the pound's volatility continue in the face of the euro's relative stability.

“In that context of people just longing for clearer rules, for reliability, for stability, for certainty, you might just find that becoming part of the reserve currency on our doorstep might become part of the recipe . . . by which we put the British economy back together on a more sustainable footing.”

This is a bold position for the Lib Dem leader, sure to provide him with the spotlight in the days to come. Unfortunately for Clegg, his authority to influence such a decision is nonexistent. The Lib Dems occupy a seemingly permanent minority position and Clegg himself has failed to distinguish his leadership since succeeding Ming in 2007. The buzz in Westminster is that the Lib Dems are engaged in backroom negotiations with the Tories over a possible coalition government should the next general election result in a hung Parliament (conservative win short of a majority). But a Tory minority government would be an unlikely partner for the Lib Dems on Europe in general, and especially so on Euro accession.

Regardless of his or his party's prospects, Clegg has thrust Euro accession back into the British political discussion. I am eager to see how Brown and Cameron respond.