The fragile middle
Decades of rapid growth have created a new middle class in the developing world, prompting multinational companies to invest heavily in emerging markets as they attempt to serve millions of new consumers. But rising inequality and slowing growth has presented a risk to this new middle class and is forcing companies to rethink their strategy. In this week’s podcast, Ferdinando Giugliano is joined by Shawn Donnan, world trade editor and James Kynge, emerging markets editor to discuss this nascent middle class and its prospects in the face of slowing growth
The news that Greece is returning to the markets as an issuer of sovereign-debt is symbolic of the resurgence of interest in Europe among international – and particularly US – investors. As ever there is a circular logic in play here.
Because most investors no longer fear a collapse of the euro, Greece can come back to the markets. And the sight of Greece returning to the markets will confirm the prejudices of those who argue that the crisis in the eurozone is over.
But just as international investors were, in retrospect, too panic-stricken about Europe in 2012 – I suspect they are probably too relaxed now.
Greece’s return to the markets is one striking sign of this. Another is the fact that 5-year Spanish bonds now have a lower yield than their US equivalent – despite the fact that Spain is barely growing, that its budget-deficit continues to bust EU rules, while unemployment is more than 25 per cent. Read more
By Gideon Rachman
“Whatever it takes.” Mario Draghi’s declaration that he would save the euro could well go down as the most effective three-word statement by a Roman since Julius Caesar’s veni, vidi, vici.
By Gideon Rachman
Germany has surrendered and the euro is saved. That seems to be the markets’ interpretation of last week’s ruling by the German constitutional court on the European Central Bank’s “whatever it takes” policy to save the single currency. The judges’ ruling essentially boiled down to this: “We don’t like what the ECB is doing. We think it illegal. But only the European Court of Justice can strike it down.”
German Constitutional Court (Matthias Hangst/Getty Images)
We don’t like what the European Central Bank is doing – but if someone is going to drop a nuclear bomb on the eurozone, it won’t be us. This seems to be the main message in today’s judgment from Germany’s constitutional court on the ECB’s Outright Monetary Transactions programme.
The OMT is an initiative aimed at saving the eurozone with large-scale ECB purchases of the bonds of governments vulnerable on financial markets, in return for a commitment to deep-seated economic reforms. Germany’s Bundesbank and much of the German public have never warmed to the OMT – even though the programme has never actually been used and, some experts think, never will be.
So the German court’s judgment will come as a relief to Mario Draghi, the ECB president, and all those who hold that the OMT, unveiled in August and September 2012, is the single most important reason why Europe’s monetary union no longer appears in mortal danger. But mixed with this relief will be a feeling that the German court’s judgement is not entirely helpful – and that some of its arguments are not particularly well-founded. Read more
Ask a German politician or pundit to account for the strength of Germany’s economy. I’ll bet you a plate of Nürnberger sausages that he or she will praise the labour market and welfare reforms adopted about 10 years ago by the government of Gerhard Schröder, Chancellor Angela Merkel’s predecessor.
The “Hartz reforms” tightened the terms on which unemployed Germans claim welfare benefits. They laid the emphasis on putting people quickly back into jobs, at lower pay if necessary. Nowadays German unemployment is remarkably low (5.1 per cent of the workforce in December 2013, according to Eurostat, versus 27.8 per cent in Greece, 25.8 per cent in Spain and 12.7 per cent in Italy).
However, some newly published research by four German economists challenges the argument that the Hartz reforms are the main cause of the nation’s economic recovery. Their carefully written study, entitled “From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy”, should be required reading for everyone concerned with boosting the eurozone’s economic performance. Read more
By Gideon Rachman
In 1996 a friend of mine called Jim Rohwer published a book called Asia Rising. A few months later, Asia crashed. The financial crisis of 1997 made my colleague’s book look foolish. I thought of Jim Rohwer (who died prematurely in 2001) last week as a I listened to another Jim – Jim O’Neill, formerly of Goldman Sachs – defending his bullish views on emerging markets in a radio interview.
Every year, there is debate at Davos about what is hot – and what is decidedly not. This year, the emerging markets are definitely in the second camp.
Never mind the fact that the streets of Davos are full of cheery posters proclaiming the joys of Malaysia, India or Brazil – or that Nigerian food was being served to Davos delegates at lunch (complete with snail stew.) Also ignore the determinedly upbeat messages emanating from a host of officials from the BRICs nations.
Behind the chirpy smiles, a new mood of anxiety is stalking the emerging markets delegations, amplified by the recent dramas around Argentina. And that marks a stark contrast to recent years, when the emerging markets were regarded as the new saviours of global growth – and their leaders strutted around the Davos corridors with pride. Read more
Lawrence Summers (c) WEF
On Thursday, I moderated a fascinating lunch-time discussion on “secular
stagnation” with Lawrence Summers, former US treasury secretary,
who has recently propounded this idea.
Other participants were Motoshige Itoh of Tokyo university, Edmund Phelps, Nobel laureate, director of the Center on Capitalism and Society, Columbia University, Adam Posen, director of the Peterson Institute for International Economics, Helene Rey of the London Business School and Kenneth Rogoff of Harvard. This was a notably heavy-weight panel.
The discussion was rich and complex. But here are some conclusions.
First, since the crisis in 2007 and 2008, the equilibrium long-run real interest rate in the high-income countries has been ultra-low and the equilibrium real short rate has been negative. There is no disagreement on this. This was an obvious indicator of sustained and chronic weakness of demand.
Second, the main instrument we have used to deal with condition this has been hyper-aggressive monetary policy. But this creates substantial problems (in some views, at least, including mine): it distributes income towards both the financial sector and the rich, while also generating bubbles. Read more
Chris Giles, economics editor, finds a mood of optimism among economic experts on the first day of the World Economic Forum in Davos, but concerns remain over the strength of the recovery.