Here are further glimpses of the Davos kaleidoscope.
First, my friend Moises Naim, editor of Foreign Policy, gave me a new acronym on the global recovery. It is LUV. The L is for the L-shaped recovery of the European economies. The U is for the U-shaped recovery of the US economy. The V is for the shape of the recovery of big emerging economies.
This looks depressingly right to me. In particular, the eurozone seems to have decided on an adjustment to its huge internal imbalances that is loaded entirely on the weak countries of the periphery. But the periphery cannot adjust if the core – namely, Germany – does not adjust too, by expanding demand. Neither the ECB nor the German government seems to understand this simple point, though one coalition partner – the FDP – does seem to do so.
Second, the global attempt at addressing imbalances – the “mutual assessment programme” being orchestrated by the International Monetary Fund – may well run into the sand this year. That would be a great pity.
What is needed is political commitment at a high level. The concern is that, with the crisis largely over, the will to take on difficult issues – exchange rates, for example – will disappear. It was easy for everybody to agree to expand spending and ease monetary policy last year. Now it all gets harder. It would be depressing if top politicians forgot how close the world economy came to disaster just over a year ago. But they may well do so, all the same.
Third, the relationship between the US and China is widely accepted as central. These behemoths look quite similar. Both can respond well to crisis, but neither seems able to deal with long-term structural weaknesses. China’s failures centre on its over-reliance on investment and exports, the adverse shift in income distribution, away from households, and the extraordinarily low share of consumption in GDP. US failures are well-known, too: energy policy, for example. Welcome to the policy gridlock of Chimerica.
Fourth, I am increasingly concerned that stimulus – especially fiscal stimulus – will be withdrawn too soon. We must remember that the developed countries still have enormous slack in their economties. It is not clear that a withdrawal of fiscal stimulus would – or even could – be adequately offset by monetary policy.
Finally, I am listening to Lawrence Summers as I write. He has emphasised that we cannot maintain global integration if it is seen as a source of domestic disintegration. This tension – that between the global economy and domestic politics – is a central challenge of our time. It affects everything we try to do.
