💾 Archived View for gmi.noulin.net › mobileNews › 3426.gmi captured on 2023-01-29 at 19:16:01. Gemini links have been rewritten to link to archived content
⬅️ Previous capture (2023-01-29)
-=-=-=-=-=-=-
2011-09-30 13:39:24
Unless politicians act more boldly, the world economy will keep heading towards
a black hole
Oct 1st 2011 | from the print edition
IN DARK days, people naturally seek glimmers of hope. So it was that financial
markets, long battered by the ever-worsening euro crisis, rallied early this
week amid speculation that Europe s leaders had been bullied by the rest of the
world into at last putting together a big plan to save the single currency.
Investors ventured out from safe-haven bonds into riskier assets. Stock prices
jumped: those of embattled French banks soared by almost 20% in just two days.
But those hopes are likely to fade, for three reasons. First, for all the
breathless headlines from the IMF/World Bank meetings in Washington, DC, Europe
s leaders are a long way from a deal on how to save the euro. The best that
can be said is that they now have a plan to have a plan, probably by early
November. Second, even if a catastrophe in Europe is avoided, the prospects for
the world economy are darkening, as the rich world s fiscal austerity
intensifies and slowing emerging economies provide less of a cushion for global
growth. Third, America s politicians are, once again, threatening to wreck the
recovery with irresponsible fiscal brinkmanship. Together, these developments
point to a perilous period ahead.
Slipping and grasping
Most of the blame for this should be heaped on the leaders of the euro zone,
still the biggest immediate danger. The doom-laden lectures from the Americans
and others in Washington last week did achieve something: Europe s policymakers
now recognise that more must be done. They are, at last, focusing on the right
priorities: building a firewall around illiquid but solvent countries like
Italy; bolstering Europe s banks; and dealing far more decisively with Greece.
The idea is to have a plan in place by the Cannes summit of the G20 in early
November.
That, however, is a long time to wait and the Europeans still disagree
vehemently about how to do any of this (see article). Germany, for instance,
thinks the main problem is fiscal profligacy and so is reluctant to boost
Europe s rescue fund; yet a far bigger fund is needed if a rescue is to be
credible. The most urgent solutions, such as restructuring Greece s debt or
building a protective barrier around Italy, require the most political courage
something that Angela Merkel, Nicolas Sarkozy et al have yet to exhibit. The
chances of a bold enough plan will shrink if markets stabilise. The less scared
they are, the more likely Europe s spineless policymakers are to jump yet again
for a plan that does just enough to stave off catastrophe temporarily, but lets
the underlying problem get worse.
Much of the world is now paying for their timidity: witness the increasingly
dark economic backdrop. A slew of recent indicators suggests the euro area is
slipping into recession, as Germany s exports slow, the fiscal screws tighten,
confidence slumps and the banks travails imply tighter credit. Even if the
euro-zone crisis were to be solved tomorrow, the region s GDP would probably
shrink over the coming months.
America s economy is still limping along, though the summer slump in share
prices and consumer confidence suggest future spending will weaken further. The
Federal Reserve is trying new ways of support, somewhat half-heartedly.
Whatever it does, America is currently on course for the most stringent fiscal
tightening of any big economy in 2012, as temporary tax cuts and unemployment
insurance expire at the end of this year. That could change if Congress came to
its senses, passed Barack Obama s jobs plan and agreed on a medium-term
deficit-reduction deal by November. If Democrats and Republicans fail to hash
out a compromise on the deficit, draconian spending cuts will follow in 2013.
For all the tirades against the Europeans, America s economy risks being pushed
into recession by its own fiscal policy and by the fact that both parties are
more interested in positioning themselves for the 2012 elections than in
reaching the compromises needed to steer away from that hazardous course.
What about the cushion the emerging markets provide? That, too, is getting
thinner. Their growth is slowing (as it needed to, since many economies were
overheating). Recent falls in emerging-world currencies and stock prices show
that financial panic can afflict the periphery too (see article). Some emerging
economies, including China, have less room to repeat their 2008-09 stimulus
because of the debts that splurge left behind. Monetary policy can be loosened:
several central banks have cut rates. But, overall, the emerging world will be
less of a buoy to global growth than it has been hitherto.
Some of these constraints are unavoidable. Many governments have less room to
support weak economies than they did in 2008. Some caution, too, is
understandable from central bankers who have waded ever deeper into
unconventional monetary policy. But governments are not just failing to act:
they are exacerbating the mess.
Lacking conviction and courage
In the aftermath of the Lehman crisis, policymakers broadly did the right
thing. The result was not a rapid return to prosperity in the West, but after
such a big balance-sheet recession that was never going to happen. Now, more
often than not, policymakers seem to be getting it wrong. Their mistakes vary,
but two sorts stand out. One is an overwhelming emphasis on short-term fiscal
austerity over growth. Fixing that means different things in different places:
Germany could loosen fiscal policy, while in Britain the reins should merely be
tightened more slowly. But the collective obsession with short-term austerity
across the rich world is hurting.
The second failure is one of honesty. Too many rich-world politicians have
failed to tell voters the scale of the problem. In Germany, where the jobless
rate is lower than in 2008, people tend to think the crisis is about lazy
Greeks and Italians. Mrs Merkel needs to explain clearly that it also includes
Germany s own banks and that Germany faces a choice between a costly solution
and a ruinous one. In America the Republicans are guilty of outrageous
obstructionism and misleading simplification, while Mr Obama has favoured class
warfare over fiscal leadership. At a time of enormous problems, the politicians
seem Lilliputian. That s the real reason to be afraid.
from the print edition | Leaders