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.
The remainder of this column can be read here. Please post comments below.
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 remainder of this column can be read here. Please post comments below.
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.
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.
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.
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.
Mr Volcker is proposing a version of the distinction between commercial and investment banking brought into the US by the Glass-Steagall Act of 1933. In announcing his new proposals last week, Mr Obama referred to a “Volcker Rule” that “banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers”. Furthermore, added the president: “I’m also proposing that we prevent the further consolidation of our financial system.”
The remainder of this article can be read here. Please post comments below.
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.
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.
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