Summer, Sun and Fun?


Maybe it is the sunspots after all. William Jevons, an English economist of the late 19th century, believed that business cycles follow solar outbursts. Later, “sunspots” became a more generic concept, denoting occurrences influencing the economy but lying outside human influence.This summer (?) the weather in Europe was quite terrible – and so was the fate of the Euro. Market panics, politicians’ impotence and lack of recognition that the problem of some of the Eurozone’s peripheral countries’ problem was not a lack of liquidity, but of insolvency, and the ratched-up anti-Europe rhetoric of nationalistic parties all over Europe, made for a veritable next crisis: double-dip, triple or even six-pack?

The USA economy sways on ever more turbulent waters, the US politicians are less heedless, but more dogmatically Tea-crazy; China is battling increasing inflation and reduced demand for its export goods; Japan is changing prime ministers like dirty shirts; in short: the world economy is in a mess – but no political leadership is in sight to tackle the problems.

Economics Nobel laureates meeting in Lindau/Germany recently were as divided as ever on the causes of the crises, even more so on the cures; the Central Bankers in Jackson Hole are timidly, but correctly asking for bank recapitalizations – aiming to save the financial world as it is, rather than designing a new global architecture for the future.

Some relief may be coming – as is becoming more and more usual – from the Chinese, at least as far as diagnosing their own and some of the world’s problems. Their recently published 12th 5-year plan recognizes that their export-driven growth model has been assuring them massive catching-up for the past 30 years (average growth rate 10%!!!), but that in the future this will not be a viable growth model. They know that they will have a massive ageing problem (the effects of the one-child family), that they lack innovative dynamics and that the other ¾ of the world will not keep importing manufactured goods from them at the past pace. Thus, their gigantic export surplus by which they have amassed 3.2 trillion $ in foreign currency, mostly invested in US treasury bills – one of the prime culprits for the present global imbalances feeding the crisis, will have to disappear, requiring them to both increase private consumption and –as a prerequisite for less savings and more consumer spending – more public consumption by building up a more than rudimentary social system (unemployment benefits, pensions, health care). If this is successful, it will eat up much of their reserves, eliminating one important part of global imbalances. Industrial and innovation policy, and a much larger services sector might lessen the dependence of the Chinese economy on their importing partners. So far, so promising.

Whether the lip service the 5-year plan pays to a more responsible Chinese participation in global economic governance will become reality, is another question. Here also the international community must prepare the ground, by easing the Chinese renminbi into the international currency basket, Special Drawing Rights, which forms the basis of the IMF’s reserves. This has been a long-standing Chinese request (alongside Brazil, Turkey, South Africa, and others) and might give China the necessary incentive to conduct a more globally-minded exchange rate and economic policy in return for more influence in this (and other) global institution.

Much more depressing is an analysis of what happens in the Eurozone: the half-hearted decisions to enlarge the stability mechanism EFSF in order to relieve the European Central Bank of its unwilling role as lender of last resort are being torpedoed by Finnish demands for special extra guarantees and potentially by the German Supreme Court as unconstitutional, adding ammunition to the centrifugal forces within the EU member states. Fearful politicians fail to act against the slogans of the “good and diligent” against “throwing more of  o u r  hard-earned money at the irresponsible and profligate (Southerners)”, thus aiding and abetting calls for the break-up of the Eurozone, for expelling this and that country, for forming a core-Eurozone of the righteous. They fail to discuss in public the deleterious effects for all citizens of all EU countries of such irresponsible agitation, but also fail to think of a “Plan B” in case their own inactivity and impotence (in the face of the almighty financial markets) lead to such a break-up.

Great Britain makes judgement calls from the sidelines. It remains to be seen whether the soon-to-be-announced results of the Vickers Banking Commission, which most likely will call for a severe segmentation of deposit banks and investment banking activities, will be taken up and implemented by the government. Lobbying against such plans has been very vigorous during the past weeks.

It is not yet doomsday. May we be lucky enough to be able to say in a few years’ time that our policymakers have led us out of the deepest economic crisis in 75 years by having learned the lessons of the Great Depression. This, however, is the least likely scenario, judging from the experience of how they handled the last few years.

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Filed under Crisis Response, European Union, Financial Market Regulation, Global Governance

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