Daily Archives: December 5, 2011

The end of the eurozone crisis could now be in sight. One day, the euro verges on collapse. The next, a comprehensive solution is within reach. With sky-high Italian, Spanish and even French bond yields, we want a final answer: is the eurozone to be or not to be?

But what if it doesn’t sink or swim – what if it just bobs? Leaders of the 17 member states, the European Commission and Council will convene on Friday for what is set to be a climatic meeting. They will reaffirm their common goal: a united eurozone with prospects for sustainable growth. They are also likely to signal, more so than at any previous moment in this crisis, agreement on a systemic solution: a more robust economic framework to govern the euro. Near-term crisis management will be backstopped by the European Central Bank.

But over time these bright signals will dim as the leaders’ battle over priority, sequence and scope. We’ll get a grand bargain in theory, but a reality that does little more than muddle through. The eurozone will not fragment in the next year – and it is unlikely that it ever will. But that does not mean the problems have been solved. Instead, expect continued uncertainty, volatility and macro headwinds as we wait for the yes or no answer that isn’t coming. Welcome to the most turbulent status quo in economic history.

Just days ago, many were predicting a collaps of the eurozone. But last Monday, Mario Draghi, president of the ECB, delivered a game-changer. If there is agreement on a “fiscal compact” between member states that leads to a more unified eurozone macroeconomic policy framework, then “other elements might follow”. So on Friday eurozone leaders will do enough to allow the ECB to step in and manage near-term volatility, while also making a tentative road map toward fiscal centralisation. Importantly, progress can come without treaty reform, at least in the near future. This means proposals small enough to avoid a messy ratification process in European Union’s 27 legislatures could, in fact, prove big enough to justify ECB support. Down the road, the fiscal compact will progress through a reworking of the EU’s charter. There is light at the end of the tunnel.

Often when things look bad, they’re not as bad as they seem. But when things look good, they’re not nearly that rosy. This is the essence of ‘muddling through’. An overwhelmingly resilient force, ‘muddling through’ blunts systemic solutions, but also cushions against grand failures.

Yet by the same token, ‘muddling through’ blunts comprehensive reform. As lofty as Friday’s proposals toward fiscal union may be, their adoption will prove acrimonious and protracted. Each member state will grapple to minimise the infringement on its sovereignty. Germany and France will aim to set the rules for weaker states that will push back against asymmetric adjustment. European institutions will look to reinforce their own role in the new framework. It will be a case of incremental reform that won’t end debate, but rather engender more of it.

Although this may be ugly, it does constitute progress. Look at how far we have already come with the creation of the European Financial Stability Facility, the European Stability Mechanism and now, potential treaty change. And while this is no way to win a race, the eurozone will reach the finish line. Merkel’s “marathon” analogy speaks to this.

Just as ‘muddling through’ kills the best and worst of outcomes, expect the German approach to do the same. After all, it already has done. In the late 1990s, Germany, with Europe’s strongest economy and institutions, had the most to lose with the euro’s creation. As a result, it disproportionately influenced the bloc’s design. The Delors report, which set up the EMU blueprint, mirrored German preferences for a more decentralised system of economic policy – one of the reasons for the current mess. Fast forward a decade: Germany is once again ascendant and will once again have outsized influence on the design of the rules going forward. This will prevent the optimal solution being implemented. The burden of adjustment will fall on deficit countries, while the beneficial role the EC could play as guardian of the treaties will be limited. Check back in a decade for a full damage report.

The eurozone has come a long way, even if its leaders fail at every stage to get ahead of its problems. Look for good news on Friday: a systemic solution will be outlined, but its realisation will be more ‘muddle through’. It won’t be pretty, but neither will the eurozone experiment fail. Call us optimists, for lack of a better word.

This article was co-written with Mujtaba Rahman, a Europe analyst at Eurasia Group. Ian Bremmer is president of Eurasia Group and author of ‘The End of the Free Market’

News that the US unemployment rate has fallen 0.4 percentage points and that we have created 120,000 jobs is better tidings than of late, but we need to do much better: just to match population growth we need to create at least 150,000 jobs a month.

For hiring to occur at a pace that would support recovery, we would need at least 500,000 more hires per month. Instead, payrolls today are more than 7m shy of where they were when the Great Recession began.

For American workers, these are the worst times since the depth of the Great Depression. The unemployment rate, the highest and most sustained in seven decades, improved last month primarily because more than 300,000 people left the labour force. And the situation is even grimmer than suggested by the dismal statistics, calculated from a base of only 60,000 families. Analysts have concluded that the combined unemployment and under-employment rate is slightly above a staggering 20 per cent of the labour force.

Worse, 40 per cent of the jobless have been out of work for six months or more, compared with 10 per cent in 2007. The average period of unemployment now exceeds 26 weeks, well above the previous peak in July 1983 of just 21.2 weeks. This is critical because the longer that people of any age are out of work, the less likely they are to find another job.

Most of the activity in the labour market today reflects “churn”, the continual process of replacing workers, which is not the same as expansion. High churn generally means that workers are moving from declining sectors to better jobs in growing sectors that pay higher wages. That sounds good, but here is another dismaying trend. In previous recessions, around 1m more Americans every month moved to better jobs. This means that almost 35m Americans are trapped in jobs they would have left in better times.

But what of the recent headlines suggesting job growth has recently improved? Again, there is no silver lining. The apparent improvements result primarily from the decline in the number of layoffs – down from 2.5m per month in February 2009 to 1.5m two years later – rather than from increased hiring.

The Great Recession has shown employers they can do with fewer workers than before, aided by technology and by agencies that allow them to hire temps almost instantly – reducing the need to hire in anticipation of a pick-up in business. Companies know they need to come up with a newer business model to weather a long-term downturn. Predictably, a lot of jobs have also gone overseas.

The outlook is bleak. Over 20 per cent of companies say that employment in their firms will never return to pre-recession levels. Another 40-plus per cent say revenues would have to rise around 40 per cent to return to pre-recession employment levels. Moreover, most of the new jobs available don’t match the pay, the hours or the benefits of the positions that vanished during the recession. Millions of Americans face a lost decade, living from paycheck to paycheck, struggling to pay their bills, having to borrow money and go deeper into debt.

Who, among the contenders for the White House, has a remedy for this catastrophe? Clearly, this dysfunctional Congress offers no hope until after 2012. Yet we must reverse the decline in American education that has left workers less able to compete in the new world. Skills, not muscle, are the only reliable path to high-wage jobs, in an era when technology and globalisation allow companies to make new investments in regions where labour is cheap.

We also need to approve many more H1B visas to permit highly educated science graduates to take work in engineering and technology. Contrary to popular perception of immigrants, these are people who would create jobs rather than take them. And we should rationalise the stumbling process of certifying patents in order to unleash thousands of start-ups, the single greatest source of new employment.

Greater certainty over policy would also help the economy. A metric devised by economists at Stanford University and the University of Chicago shows that policy uncertainty accounts for about 2.5m jobs lost. They assert there is a widespread view in business that the healthcare bill makes it burdensome to hire, underscoring how political uncertainty has made it more difficult to plan ahead. The National Federation of Independent Business asked small businesses their biggest problem. Sixteen per cent of small businesses cited “government requirements and red tape”.

Finally we need to invest in a national infrastructure bank. We ought to undertake new projects of the kind that built America. But we are not even keeping up with repairs – which will cost much more when our bridges, roads, dams, schools and sewage systems collapse. We look askance at the Europeans, but Washington is a graveyard of American dreams.

The writer is editor-in-chief of US News & World Report and chairman, chief executive and co-founder of Boston Properties, a real estate group.

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