Niall Ferguson is not given to understatement. So I was not surprised by the claim last week that the US will face a Greek crisis. I promptly dismissed this as hysteria. Like many other high-income countries, the US is indeed walking a fiscal tightrope. But the dangers are excessive looseness in the long run and excessive tightness in the short run. It is a dilemma of which Prof Ferguson seems unaware.
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The bogeyman of a hung parliament is being used to terrify British voters. What is needed, it is argued, is a government with a strong majority, to rescue the UK from the threat of national bankruptcy. This is nonsense. The UK does not face national bankruptcy and, if it did, would not need strong single party government to save it. Has everybody forgotten that in the gravest crisis ever faced by the UK, Winston Churchill governed with a coalition? Why is the present crisis so very different? So poorly has single-party despotism governed the UK that I would welcome a coalition or, at worst, a minority government.
No serious person denies that the country confronts a huge fiscal challenge. Among those serious people are, of course, the leadership of the Liberal Democrats. I cannot be the only person who believes that Vince Cable, the party’s shadow chancellor, is far better qualified to address this challenge than any current member of the Conservative front bench. Indeed, the latter has blown worryingly hot and cold over its elusive plans for fiscal stringency.
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.
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.
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.
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.”
Martin Wolf is writing for the FT’s Davos blog. Here is a copy of his first entry.
I spent my day being interviewed by other media organisations and preparing my Friday column. So I did not attend any sessions. I rely on the excellent reporting of my colleagues to tell me what is happening in Davos, just like all the other readers of the FT and ft.com. But I have still managed to learn something from chance encounters here.
So what have I learned so far?
First, my criticism of the “Volcker rule” in banking, subject of my column this morning, is controversial. The desire of many non-bankers to cut the bankers down to size is, even here, quite noticeable. Have I gone soft on bankers? I do hope not. But this new addition to the already pressing weight of uncertainty worries me greatly.
Second, the US administration is effectively absent, though Larry Summers will be here later in the week, representing the White House. Whether this absence is because of the State of the Union, Congressional hearings (as in the case of poor Tim Geithner) or a reluctance to be seen junketing with the world’s financial and business elite, I do not know. I suspect the latter.
Today, the people see in the financial sector not the skilful hands of erstwhile masters of the universe, but the grabbing hands of greedy ingrates. It is little wonder, then, that a desperate President Obama, battered by the voters in Massachusetts, has turned upon a group even less popular than his party. He has duly added the axe of Paul Volcker, 82-year-old former chairman of the Federal Reserve, to the regulatory scalpel offered by his Treasury secretary, Tim Geithner.
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 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.