In U.S.A. Republicans prefer to see Obama fail to economic success; in Europe, 27 countries pull in different directions
The global economy ends 2010 more divided than at the beginning of the year. On the one hand, countries with emerging markets such as India, China and the Southeast Asian economies are experiencing strong growth. On the other hand, Europe and the United States face stagnation – in fact, Japanese-style malaise – and tenaciously high unemployment. The problem in advanced countries is not a recovery without employment, but an anemic recovery. Or worse, the possibility of a double-dip recession.
This two-track world poses some unusual risks. While Asia’s economic output is too small to drive growth in the rest of the world, it may be enough to drive up commodity prices.
Meanwhile, efforts on the part of the United States to stimulate its economy through the policy of “quantitative easing” may fail. After all, in globalized financial markets, money is looking for the best prospects in the world, and these prospects are in Asia, not the United States. So the money will not go where it is needed, and much of that money will end where it is not wanted, causing further increases in the prices of assets and commodities, especially in emerging markets.
Given the high levels of unemployment in Europe and the United States, it is unlikely that “quantitative easing” will mean an outbreak of inflation. It could, on the other hand, increase the anxieties about future inflation, leading to higher long-term interest rates, precisely the opposite of the objective of the Federal Reserve.
This is not the only risk of negative impact, not even the most important, that the global economy faces. The greatest threat comes from the wave of austerity sweeping the world, while governments, particularly in Europe, face the large deficits caused by the Great Recession and while anxiety about the ability of some countries to meet their debt payments contributes to the instability of financial markets.
The result of premature fiscal consolidation is almost announced: growth will slow down, tax revenues will decrease and deficit reduction will be disappointing. And, in our globally integrated world, the slowdown in Europe will exacerbate the slowdown in the United States, and vice versa.
In a situation in which the United States can borrow at unprecedented low interest rates, and given the promise of high returns from public investments after a decade of neglect, it is clear what should be done. A large-scale public investment program would stimulate short-term employment and long-term growth, which in the end would result in a lower national debt. But the financial markets demonstrated their shortsightedness in the years that preceded the crisis, and they are doing it again, by exerting pressure to cut spending, even if that means drastically reducing the necessary public investments.
What’s more, the political gridlock will ensure that little is done about the other pressing problems facing the US economy: foreclosures are likely to continue with all their fury (leaving aside legal complications); Small and medium-sized businesses are likely to remain deprived of funds, and the small and medium-sized banks that traditionally offer them may still struggle to survive.
In Europe, meanwhile, things are unlikely to go better. Europe finally managed to come to the rescue of Greece and Ireland. On the eve of the crisis, both countries were ruled by right-wing governments marked by a capitalism of connivance or worse, which demonstrated once again that the free market economy did not work in Europe better than it did in the United States.
In Greece, as in the United States, the task of clearing the mess fell on a new government. Perhaps unsurprisingly, the Irish government that encouraged a reckless bank loan and the creation of a housing bubble was no better able to manage the economy after the crisis than before.
Leaving politics aside, real estate bubbles leave behind a legacy of debt and productive overcapacity in the real estate market that can not be easily rectified, especially when politically connected banks refuse to restructure mortgages.
In my opinion, trying to discern the economic outlook for 2011 is not a particularly interesting issue: the answer is grim, with little upside potential and a lot of downside risk. More important is: how long will it take for Europe and the United States to recover and can Asian economies seemingly dependent on exports continue to grow if their historic markets languish?
My best bet is that these countries will maintain a rapid growth to the extent that they turn their economic focus towards their domestic markets, vast and unexplored. This will require considerable restructuring of their economies, but both China and India are dynamic and resilient in their response to the Great Recession.
I’m not so optimistic about Europe and the US In both cases, the underlying problem is insufficient total demand. The ultimate irony is that there is simultaneously excessive productive capacity, vast unsatisfied needs and policies that could restore growth if they used that capacity to meet the needs.
Both the United States and Europe, for example, must adapt their economies to face the challenges of global warming. There are feasible policies that would work in the context of long-term budgetary constraints. The problem is politics: in the United States, the Republican Party would prefer to see President Barack Obama fail rather than witness an economic success. In Europe, 27 countries with different interests and perspectives pull in different directions, without enough solidarity to compensate. The rescue packages are, from this perspective, impressive achievements.