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Europe’s stragglers need German consumers

February 9th, 2010 11:39pm
by Martin Wolf

Pinn illustration

The financial crisis of 2009 is morphing into the fiscal anxieties of 2010. This is particularly true inside the eurozone. Spreads between rates of interest on Greek bonds and German bunds touched 3.86 percentage points in late January (see chart). The risk has emerged of a self-fulfilling confidence crisis that would have dire consequences for other vulnerable members. Much attention has focused on what might happen if the crisis were not resolved, with talk of bail-outs, defaults or even exits from the euro. But what would need to be done to resolve the crisis, without such a calamity? It is the demand, stupid.

Conventional wisdom in the eurozone is that the crises are the result of poor policy-making in peripheral countries. In particular, fiscal policy has been too loose and economies too inflexible. The wages of such sins are austerity. Then, after a lengthy penance, the lost sheep returns to the fold of stability.

The remainder of this column can be read here. Please post comments below.

February 9th, 2010 11:39pm in Eurozone, Monetary policy, Recession, Risk | Permalink | Comment

What the world must do to sustain its convalescence

February 2nd, 2010 11:06pm
by Martin Wolf

Pinn

So what did I make of this year’s annual meeting of the World Economic Forum at Davos? It felt like sitting at the bedside of somebody who had survived a heart attack but was unsure how long it would take to recover full vigour, if, indeed, he would at all. The mood of “Davos men” (yes, they mostly still are) was, as my colleague, Gideon Rachman, has pointed out, one of anxiety. Meanwhile, the participants in a still predominantly western meeting looked at the youthful vigour of emerging economies with admiration, envy and even fear.

For me, the highlight of the programme was the economic outlook session on Saturday.* This is not only because I was moderator. The starting point for the discussion was an obvious one: the policy interventions of late 2008 and 2009 have been a resounding success. The outcome has been a far briefer and shallower recession than most participants imagined a year ago. That is obvious from the successive consensus of forecasts for 2010. For almost every significant economy, the forecast for growth this year is higher than it was a year or even six months ago (see charts). The world economy survived the heart attack in the financial system.

The remainder of this article can be read here. Please post comments below.

February 2nd, 2010 11:06pm in Capitalism, Central banks, Economics, Fiscal policy, Globalisation, World trade | Permalink | Comment

Britain’s strategic chocolate dilemma

January 28th, 2010 11:45pm
by Martin Wolf

Briefly, during the takeover bid for Cadbury by Kraft, I thought the UK might proclaim a “strategic chocolate” doctrine. Fortunately, that did not happen. Less fortunately, if history is any guide, the takeover of Cadbury is quite likely to be a flop. If so, the winners will be the shareholders of Cadbury, the advisers for both sides and those who arranged the loans. The right question, then, is not about chocolate. It is about the market in corporate control itself.

For high priests of Anglo-American capitalism, this question is heresy. They would insist that shareholders own the business and have a right to dispose of their property as they see fit. They would add that an active market in corporate control is an essential element in “shareholder value maximisation”, on which an efficient market economy rests. Yet, after financial markets have gone so spectacularly awry, the question whether companies should be left to the markets is being raised.

The remainder of this article can be read here. Please post comments below.

January 28th, 2010 11:45pm in Capitalism | Permalink | Comment

From THE FT'S DAVOS BLOG January 28, 2010

Martin Wolf in Davos: The French world order

Martin Wolf is writing for the FT’s Davos blog. Here is a copy of his second entry.

Another weird day has passed. But all days at Davos are weird. One never knows what is going on, except for the fact that, wherever one is, one would be far better off somewhere else.

The highlight of yesterday evening was the opening address of President Nicolas Sarkozy of France. The speech is so classically French as to be a caricature of itself: bombastic, high-flown and verbose, it addresses a vast range of contemporary challenges, around the grand theme of moralising and containing capitalism. Yet, I have to admit, there is much in it with which I find myself in agreement.

“Purely financial capitalism is a distortion, and we have seen the risks it involves for the world economy. But anti-capitalism is a dead end that is even worse.” Continue reading "Martin Wolf in Davos: The French world order"

January 28th, 2010 6:48pm in Economics | Permalink

The Greek tragedy deserves a global audience

January 20th, 2010 1:30am
by Martin Wolf

The Greek government has promised to slash its fiscal deficit from an estimated 12.7 per cent of gross domestic product last year to 3 per cent in 2012. Is it plausible that this will happen? Not very. But Greece is merely the canary in the fiscal coal mine. Other eurozone members are also under pressure to slash fiscal deficits. What might such pressure do to vulnerable members, to the eurozone and to the world economy?

Having falsified its figures for years, violating the trust of its partners, Greece is in the doghouse. Yet, even if it bears much of the blame, the task it is undertaking is huge. In particular, unlike most countries with massive fiscal deficits – the UK, for example – Greece cannot offset the impact of fiscal tightening by loosening monetary policy or depreciating its currency.

The remainder of this article can be read here. Please post comments below.

January 20th, 2010 1:30am in Central banks, Crisis, Economics, Eurozone | Permalink | Comment

Sexy term that helps to focus attention

January 18th, 2010 10:16am
by Martin Wolf

The invention of the Brics by Jim O’Neill of Goldman Sachs was a stroke of marketing genius. But does it have analytical relevance? My answer is: no and yes.

No, because the four countries have next to nothing in common, apart from the fact that none is a high-income country.

Yes, because the notion captures a reality of our era, which is sustained “catch-up” growth across large parts of the developing world.

China and India are by far the world’s two most populous countries, with 1.34bn and 1.18bn inhabitants in mid-2009 respectively – compared with the 308m of the next-largest, the US.

By the standards of the Asian giants, Brazil, with 193m people, and Russia, with 142m, are minnows.

China is now the “workshop of the world” – a high-investment, high-growth behemoth, with a powerful competitive position in manufacturing.

The country’s economy is also far more open than that of India: in 2006, the year before the financial crisis broke, the ratio of merchandise trade to China’s gross domestic product was 67 per cent, compared with 32 per cent for India.

India is relatively stronger in skill-intensive services: the ratio of trade in services to GDP was 15 per cent, against 7 per cent for China.

Brazil has a far more closed economy than either of the Asian giants, with a ratio of merchandise exports to GDP of a mere 22 per cent in 2006 and a ratio of service exports to GDP of 5 per cent. Half of its exports were of food and raw materials. In 2006, manufactures made up less than a fifth of Russia’s exports. It is an exporter of fuels and minerals.

Yet it is in the size, dynamism and impact that differences are most marked. According to Angus Maddison, the economic historian, China’s share in world output at purchasing power parity rose from 8 per cent in 1980 to 17 per cent in 2006. By then, China’s share of Bric output was 61 per cent – up from 42 per cent in 1990.

Neither Brazil nor Russia achieved a significant rise in their share of world GDP over this period. Even India’s rise was modest – up from 4 per cent in 1990 to 6 per cent in 2006. The story, then, has been of the rise of the two Asian giants and especially of China. But the “Ics” would have been far less sexy a term.

Yet the notion of the Brics does capture the reality of a shift in economic power away from the old developed countries, particularly western Europe and Japan, to “emerging countries”. The financial crisis has accelerated this change.

China, above all, and also India, to a marked degree, have survived the crisis almost unscathed. In 2009, according to the December consensus of forecasts, China’s economy grew by 8.5 per cent and India’s by 6.6 per cent. But Brazil’s stagnated and Russia’s shrank by 7.9 per cent. For 2010 the forecasts are for 9.6 per cent growth in China, 7.7 per cent in India, 5.1 per cent in Brazil and 4.1 per cent in Russia.

Yet can these countries impart dynamism to the world as a whole? The answer would, at first glance, appear to be yes. By 2008, the aggregate GDPs of the Brics in dollar terms were already 60 per cent of that of the US and 14 per cent of the global figure, with China generating half this total.

Goldman Sachs says the Brics contributed almost 30 per cent to global growth, in dollar terms, between 2000 and 2008, and 45 per cent since the crisis began in 2007.

That will, no doubt, intensify over time. Yet nearly all of this growth will occur inside these countries. The net stimulus to demand imparted to the rest of the world depends on a decline in their trade surpluses or rise in their deficits.

China is, again, the only Bric to have been able to do much. Even so, the net stimulus imparted between 2008 and 2009 was less than 0.2 per cent of the rest of the world’s GDP.

Nevertheless, the Brics – and, above all, China – must play a part in generating a more balanced growth in demand across the global economy.

This is one of the many challenges the world’s new policymaking machinery has to tackle.

If the attention paid to the notion of the Brics makes policymakers focus on that task, it will prove worthwhile.

January 18th, 2010 10:16am in Economics | Permalink | Comment

How the Icelandic saga should end

January 14th, 2010 11:34pm
by Martin Wolf

Iceland is famous for its sagas. But the latest one is truly dramatic: the balance sheets of its privatised financial sector grew from twice to 10 times gross domestic product, in five years. In the absence of a lender of last resort, this story had to end badly. In the panic of 2008, it did.

Because Iceland was a member of the European Economic Area, its banks were allowed to set up branches freely. To raise money, Landsbanki, one of Iceland’s now collapsed banks, set up an internet bank, Icesave, which gulled depositors by offering attractive interest rates. Under the European Union directive, Iceland also had an obligation to establish a deposit insurance scheme, which it did, through a levy on those banks.

Then came the collapse. Some Icelanders blame Gordon Brown, Britain’s prime minister, for pulling the plug on their banks. That is unreasonable. Competent observers had long concluded that the financial system was a house of cards. It was sure to collapse in a panic. Less unreasonable is the complaint over the UK’s use of a section of its anti-terrorism laws to freeze assets. But some such action was justified.

The remainder of this article can be read here. Please post comments below.

January 14th, 2010 11:34pm in Banks | Permalink | Comment

What we can learn from Japan’s decades of trouble

January 13th, 2010 12:13am
by Martin Wolf

Twenty years ago, the conventional wisdom was clear: Japan was the world’s most successful high-income country. Few guessed what the next two decades held in store. Today, the notion that Japan is on a long slide is conventional wisdom. So what went wrong? What should the new Japanese government do? What should we learn from its experience?

We must put this in context. The quality of the train system and the food make a visitor from the UK realise he comes from an utterly backward country. If this is decline, then most people would welcome it.

Yet decline it surely is. Over the past two decades the economy has grown at an average annual rate of 1.1 per cent. According to Angus Maddison, the economic historian, Japan’s gross domestic product per head (at purchasing power parity) rose from 20 per cent of US levels in 1950 to a peak of 85 per cent in 1991. By 2006, it was 72 per cent. In real terms, the value of the Nikkei stock market index is a quarter of what it was two decades ago. Perhaps most frighteningly, general government net and gross debt have jumped from 13 and 68 per cent of gross domestic product in 1991, to forecasts of 115 per cent and 227 per cent in 2010.

The remainder of this article can be read here. Please post comments below.

January 13th, 2010 12:13am in Japan | Permalink | Comment

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