On Dec. 8, Mohamed El-Erian, one of the most influential economists of the world, published a piece on Project Syndicate to predict that “divergence” will be the major term and direction of the global economy in 2015. Interestingly for an economist, he refers to the close connection between a country’s economic performance and its political stability, quoting potential more turmoils in Southern European States. He identifies 4 groups of countries which will develop differently. Growth pickup and improved social situation in the US and other high-income countries; slowing growth but still internal “maturing” by China et. al.; no growth with potential more social disruption in Europe; and “wild card” countries, led by Russia and Brazil – which may impact the global economy systemically. I have two bones to pick with El-Erian’s analysis:
I find El-Erian’s proposals for Brazil, to get back to a more market-driven growth model, to avoid the “excesses” of state intervention not surprising for Obama’s Chair of his Development Council, but still exaggerated and misguided, especially his hint that Brazil is (nearly) a second Venezuela. While Brazil undoubtedly has its problems of state inefficiency, corruption and even higher inequality, to thrash the last 15 years of Brazil seems massively overdrawn. Only by installing large welfare state programs and infrastructure investments was Brazil able to shake off decades of corrupt self-serving tycoons who nearly bankrupted this abundantly rich country. If it really desirable for all Brazilians to become as “stable” as Mexico, remains in doubt.
But let me get back to Europe’s analysis. Here the problem is that El-Erian refers only to monetary policy as political tools. While he seems to approve the ECB’s announced mode of “quantitative easing” for 2015, he does not mention any other policy instruments. In this way he goes along with much of the European economic policy elite (apart from Germany) who think that the intended policy mix of loose monetary and restrictive fiscal policy cum “structural” policies will be able to lift Europe out of the crisis. European economic policy makers to me seem like children in their bed who hide their heads under their pillow when their father reads them a scary story: by hiding they hope to avoid the event! It is extraordinary that after 7 lean years of stagnation (the EU still has not reached the GDP of 2007), after soaring unemployment, after youth unemployment hitting the 50% level in many countries, policy makers still persist in their deleterious policy mix. Will they ever learn? The lack of success of the past years should make them re-think their strategy, at the peril of increasing misery, of risking social disintegration, of promoting simplistic resentment-driven political movements by their inability to improve the situation.
The ECB alone cannot do it. Its instruments, even the non-traditional ones, are blunted. They do not seem to increase financing of welfare-improving projects, but only that of new bubbles. Of course, sovereign debt is high in Europe, but not higher than in the US, and much lower than in Japan. But the recent disregard for macroeconomics, the supply-side orientation of microeconomic approaches – where “structural reforms” alone create the necessary demand, all these fly in the face of the experience of 7 years of stagnation. Many European forecasters have been telling us (for several years) that growth is just around the corner: next year will be better! They had to revise their forecasts every quarter, and only in one direction: downward! But they all agree – European mainstream – that budget consolidation must proceed, that at most a bit extended, that (temporarily) increasing intended debt levels is of absolute evil, that governments must once more achieve “confidence”. They never explain that they do not mean the confidence of their populations, no, but that of financial market actors.
This is how far we have come. Financial markets rule the world, or at least Europe. Government and EU policy actions are primarily geared towards financial markets’ “trust in responsible government policy”. One would think that in democracies the choice between satisfying financial markets (whoever that may be) and populations should be clear. Recent history has shown it to be clear – but satisfying the wrong actors.