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2016-07-30T13:18:56Z

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UN Warns Austerity Pushing World into Recession

2011-12-21T15:51:03Z

“The world stands on the brink of a double-dip recession and a ‘lost decade’ for many countries,” according to a year-end policy brief by the UN Conference on Trade and Development (UNCTAD).

The report noted that developed nations attending the G-20 summit in Cannes (November 3-4) recognized this but have nevertheless continued with austerity policies that “point precisely in the wrong direction.” If such measures continue, UNCTAD warned, Europe will plunge into full-fledged recession in 2012 while the best that the US and Japan can look forward to is a period of stagnation.

UNCTAD economist Heiner Flassbeck accused governments around the world of ignoring the lessons of the 1930s when it was widely accepted that the second downturn of 1937-38 “was induced in part by the decision to tighten up fiscal policy too early in the recovery.” Flassbeck warned that the same scenario risks being repeated today if new policy approaches are not taken.

First and foremost, the UNCTAD brief recommends that “countries threatened by recession and deflation should avoid intensified austerity measures. Instead they should implement measures to increase domestic demand and employment." This could be done, the UN organization says, by seeing fiscal policy as a tool for growth and development much as the corporate sector does. Instead of asking whether deficits are too big, countries should consider how they could be used to stimulate the economy.

In other words, an expansionary fiscal policy could boost consumer demand and employment by directly stimulating public investment, which would in turn lead to increased private investment. “Social spending in such areas as unemployment benefits, health and housing can also be seen as promoting recovery as they sustain consumption,” the report recommends. Similarly it notes that “tax cuts that benefit lower income households can have a stronger impact on aggregate demand than cuts aimed at high-income households.”

The problem with using deficit cutting measures to regain market confidence, according to Flassbeck, is that governments are simply too big. “They are just too big to cut their expenditure and expect that their revenues will remain as they were before. They will not… Revenues will fall and with falling revenues you will see that you cannot reduce a deficit. And if you cannot reduce a deficit, you cannot regain confidence. So, the whole idea is flawed from the very beginning.”

Finally, the report noted that developed countries cannot expect emerging nations such as Brazil and China to save the day, because if the US, Europe and Japan (which represent 70% of the world economy) all slow their growth at the same time, emerging nations will follow suit.

(Photo © Heiner Flassbeck, UNCTAD Director of Globalization and Development Strategies)

The Main Challenge to Monetary Policy Makers in China

2011-11-15T18:27:14Z

Global Journal: What is the main concern of the Chinese monetary policy makers today?

Dr Li Daokui: The main challenge to monetary policy makers in China is to strike a balance between controlling China’s inflation and not attracting hot money from international capital flow. That’s our main concern. If you look at the inflow of foreign currencies into China, it is significantly higher than our trade surplus. In a typical month, trade surplus accounts for 60 to 70 % of our inflow of foreign flow in China. The rest is for the purpose of investment. That can be called hot money or cold money depending on the perceived condition of the Chinese economy. If the Chinese economy continues to be perceived as good, then a lot of hot money that originally plans to stay for a short period of time can become cold money and may stay in the Chinese economy for a much longer period of time. Conversely, if the economy is perceived to be slowing down, the so-called cold money may become hot and exit. This is a very fluid and tricky situation. If something changes the external perception of the Chinese economy, that’s immediately very challenging. That is why we don’t even know how much of our extra capital inflow is hot money or cold money. It all depends on the external perception.

Why did you say recently that an alien from outer space would find the current international monetary system very bizarre and unreasonable? Does this have anything to do with the very latest move to issue the Chinese renminbi and allow it to be used outside China ?

If you think of the international monetary system today from a detached perspective, it is indeed very strange. Why? Because, in today’s world, there is a large chunk of the world economy which is very dynamic, including the Chinese economy. However these economies cannot and do not issue their financial obligations internationally in their local currency. Instead they’re issuing these financial instruments in the US dollar or in the euro. Meanwhile the issuing economies of the US dollar and euro are encountering quite significant economic troubles. We have an asymmetry here, where dynamic economies can’t use their currency outside their borders, while economies in deep trouble are still enjoying the benefits of being the dominant players in the international monetary system. Therefore, is it highly suitable for economies such as China to encourage the financial markets to issue financial obligations in their own currencies. In doing so there are a lot of advantages. One advantage for the issuers is to be able to raise renminbi and to use the raised renminbi either to buy Chinese goods or to invest in China more easily than issuing in other currencies. In addition, the buyers of the financial obligations in renminbi can also avoid potential financial losses associated with renminbi appreciation against the US dollar or euro. So it makes sense for financial participants to issue financial instruments in renminbi. In a very general sense, this is also happening because of the restructuring of the worldwide economy.

Is this good news from the Us point ofview?

I truly believe that having currencies like the renminbi more widely used than they used to be, is fundamentally also good for the US economy. From the US point of view, having the US dollar as the most important and dominant international currency is potentially destabilizing for the US economy. When the US dollar is so widely circulated and used outside the US economy, the world demand for the US dollar necessarily fluctuates much more than the US economy’s own demand for the US dollar. Therefore, the US monetary policy has to take into account the status of the global economy. In the long run, global economic conditions will heavily affect the US economy in ways that are beyond the US’ best economic interests. Therefore, having the US dollar as the heavily dominant international currency is certainly not desirable even from the US perspective. After all, the US economy is unlikely to stay as dominant as it was before the global financial crisis.

This is quite a surprising answer from an advisor of Chinese monetary policy. is it a way of evading the exchange rate debate that is raging between the Us and Chinese governments?

Not at all. The exchange rate debate is a totally different issue. I think there is a tremendous misunderstanding among the policy makers in the US and in other countries. They tend to believe that the exchange rate ought to be the most important tool to help an economy to strike an external balance. This is wrong because in reality, especially in a fast-growing, developing economy like China, there are other very important, and perhaps even more important, variables than the exchange rate to help economies rebalance. For example, in China, there are domestic policies to encourage investments in inland areas, which are importing regions, as opposed to exporting regions in our coastal area. Also, policies have been put in place to cut consumption taxes, in order to boost consumption. The end result is that imports are growing much faster than exports. Overall in the Chinese economy we see tremendous efforts and initiatives to help our economy to rebalance and to reduce our trade surplus. In 2010, the Chinese trade surplus will probably come down to 3.5% of GDP, while it used to be at 8% before the global financial crisis. My forecast for next year is that our trade surplus will come down to 3% or even less. My point is that only looking at the exchange rate is misleading. It is important only to the extent that a gradual adjustment or realignment of exchange rates is helpful. Anything beyond that, like a drastic appreciation of the renminbi, would only cause prices and inflation to rise in the US and some Chinese exporting firms to close down. In today’s US economy, the last thing they want is a sudden surge of the price of goods imported from China, since most Chinese goods are daily consumption products for middle income families. I think that a gradual appreciation of the renminbi, combined with domestic policies in China pushing for economic restructuring, is the best policy combination we can expect for both China and the US.

Could you tell us about the situation with regard to domestic demand in China?

We saw very encouraging progress in structural change in the Chinese economy in 2010. By my estimation, for the first time in 16 years, household consumption is becoming almost the biggest driving force for GDP growth, which is forecast to be around 10.3%. Trade surplus in 2010 did not increase from the previous year, contributing nothing to growth. That is, growth comes entirely from domestic demand, of which household consumption is almost as significant as domestic investment. Thus, 2010 was a very important year of structural change in the Chinese economy. How has the economy been able to achieve such progress? Two things are very important to mention. Firstly, there are important domestic market forces pushing economic structure changes: for example, wage rates are increasing faster than GDP growth and inflation, due to a simple market mechanism, that is, surplus labor in the countryside has almost been exhausted. Therefore workers in the exporting sector in China are now able to ask for higher wages. These workers are pressing for structural changes through their demand for higher and higher wages. Secondly, for the past two years, popular politics in China, for good or for bad, have been driving higher domestic demand and growth in investment. For example, there are useful tax cuts on clean tech car purchase and investment in green technologies.

As director of the Center for China in the World economy (CCWe), you promote new ideas in economics. For example, you advocate that macro policies should proactively deal with ‘market sentiments’. Do you plan to introduce these ideas in connection with monitoring the Chinese monetary policy?

Sure. The idea stems from my academic research. I would like to push for new monetary policy thinking. In my view, monetary policy should take into account market sentiments, especially the sentiments of the stakeholders in financial markets. Market sentiments are important for all economies. Market sentiments are critical factors for asset prices, which are important for the welfare of the population. Nowadays, populations are not only concerned by inflation but also by fluctuations of the asset markets, since household income, expenditure, and wealth are also linked to asset markets. So my idea is that monetary policy should function as a stabilizer against market sentiments. One natural question is: how can policy makers correctly and accurately judge the ‘sentiments’ of asset markets? We’re not in exact science here. But policy makers should use a rough estimate to measure this ‘market sentiment’. This would be much better than doing nothing. That’s my general idea. I am an outrider in this regard, but I hope that before long many people will support my view.

One last question, this next year, in 2011, where will you travel in the world?

The year will begin immediately with many trips within China. Then Davos for the Annual Meeting and then Abu Dhabi for the Global Redesign Initiative (GRI) of the WEF. Singapore, New York and then again Abu Dhabi. It is going to be a busy year for traveling.

by Jean-Christophe Nothias

China Says it Expects Yuan Convertibility by 2015

2011-11-15T18:19:49Z

China may have a convertible currency by 2015 according to reports in the state-run press and comments made to European Union officials in Beijing. If it happens, it would mean that the yuan would become fully convertible by 2015, in a move that will likely boost the flailing euro and dollar currently struggling with the under-valuated Chinese currency.

Davide Cucino, the head of the EU Chamber of Commerce in China, reported at a press conference (September 8) that Chinese officials informed the European business community in Beijing that the yuan would attain “full convertibility” by 2015 in a gradual process.

Adviser to the Chinese Central Bank Li Daokui confirmed Friday (September 9th) at a trade fair in southeastern Xiamen that while the timetable is to be determined, it is “quite possible,” for the yuan to reach full convertibility by 2015, adding that “there should be big progress,” in this regard.

While the convertibility timeline has found believers among Asian currency experts, Western financial experts are skeptical, warning that China has made such promises before. Monish Mahurkar of the Asian Development Bank said it is “not beyond imagination,” that the yuan would become at least partially convertible by 2015. John Lee, adjunct professor at the Centre for International Security Studies, wrote in the Wall Street Journal that “Promises of full currency liberalization are designed to deflect American and European angst about China's currency policies ahead of the Group of 20 meeting next month,” and that “Beijing is in no position to deliver.”

The yuan is held within strict margins by the People’s Bank of China and set at a daily trading rate each morning, a policy which has long prompted criticism from Europe and the United States who say it affects their respective exports. The yuan has also limited conversion for investment purposes, and a fully convertible currency would mean it could become a reserve currency alongside the dollar and euro and a major player in global trade. A convertible yuan is a condition the US and Europe are demanding of China before the yuan can join to the International Monetary Fund’s currency basket.

A ‘Merkel Plan’ to Rescue Greece From Default

2011-11-11T19:54:12Z

Against all odds, German Chancellor Angela Merkel secured an 11th hour bailout for Greece on July 21st to avoid a sovereign debt crisis that threatens to repeat itself in Italy and Spain and perhaps undermine the single currency euro zone. Greece didn’t want to call it a Marshall Plan so perhaps it should be called the Merkel Plan.

The German Chancellor pushed the 17 European Finance Ministers attending a summit in Berlin to accept a €109 billion bailout in contributions from member states, the IMF (International Monetary Fund), and – Merkel’s key demand - a “voluntary” contribution by private banks and investors. Private sector creditors will thus share the cost of the bailout, putting Greece in a restricted default by accepting lower interest rates and longer repayment terms.

Merkel told reporters “all of Europe has undertaken reforms that a year and a half ago would not have been conceivable”. She pointed to the higher retirement age in Spain, the sale of state-owned assets in Greece, savings packages in Ireland and Italy and a new commitment by France to bring down its budget deficits

French President Nicolas Sarkozy, who worked on the plan with Merkel, described it as an historic moment saying, “Our ambition is to seize the Greek crisis to make a quantum leap in euro zone government.”

The plan would create a new European Financial Stability Fund (EFSF), a sort of European IMF, heavily funded by Germany, whose taxpayers would provide 27 per cent of its resources. Those Germans who approved of Merkel’s insistence on private bank participation in the bailout as punishment for having lent to Greece in the first place may balk at paying for future bailouts.

The question remains whether Greece –not to mention Spain and Italy - will now accept more pain in the short term by getting to grips with their own spending and deficit problems or whether they will sit back and wait for further transfusions of money from their healthier neighbors.

Even after reduced interest rates and a 21 percent cut in Greece’s debt to private banking institutions, Athens will still be burdened with an unsustainable debt which may eventually require another transfusion.

Whatever happens, the euro zone remains a group with a huge north-south divide, with the southern tier stuck in the no-growth lane, unable to compete in a globalized economy. Growth in the euro zone as a whole seems to have come to a halt, which raises another question: where will the money come from to fund the Merkel Plan?

Greece Shows Promise on Debt Reform Package

2011-11-11T19:53:24Z

The latest bailout program to avoid a sovereign debt crisis in Greece might actually work, according to a report by the Paris-based OECD (Organization of Economic Cooperation & Development) which groups the world’s more developed countries.

In presenting the report (August 2), OECD Secretary-General Angel Gurria said, “We are seeing the first signs that the much needed macro-economic adjustment is gradually taking place.”

Gurria praised Athens for reforms carried out over the past year. “This achievement does not always seem to be properly appreciated in Greece or abroad,” he said, stressing that continuing implementation of the rescue plan must be ‘impeccable’.

“No other OECD country has achieved such a fiscal improvement in a single year over the past three decades,” the report noted and called on Athens to reinforce labor reforms to encourage competitiveness and raise incomes and eventually cut public debt. The report said reforms laid out in the July package, taken together, “could reduce public debt to below 60% of GDP in two decades from an all-time high of 140% in 2010”.

In the July deal, eurozone leaders included a key demand by German Chancellor Angela Merkel for voluntary participation from private financing institutions to slash Greece’s borrowing costs and lengthen the maturities of loans. The package was designed to give Greece more time to carry out fundamental reforms in order to restore confidence in the face of a crisis that has since spread to Italy and Spain.

“A key prerequisite of success,” noted Gurria, “is that the burden and benefits of reform be, and be seen to be, broadly and fairly shared.” Among the recommendations in the plan is that widespread tax evasion must be “visibly and decisively attacked”. In its report, the OECD suggested awarding bonuses to the best performing tax collectors and ‘naming and shaming’ evaders.

Meanwhile, protest demonstrations have continued in Athens indicating the depth of resistance to the ongoing period of painful economic adjustment.

Two Euros Please!

2011-11-11T19:53:11Z

Germany is experiencing some difficult moments with the euro. Not only has the quality of its products created the best trade surplus, neck and neck with China, but it must also cope with a single currency in a range of various economic situations where it cannot act. Voices have been raised in Germany calling for a withdrawal from the euro. Other more moderate, but equally dangerous, voices are proclaiming an appetite for two euros - one for the strong European economies and another for the weaker ones. This would be the reinvention of a form of North-South divide on a European scale. Conscious of the difficulties, and aware that it would not automatically find itself in the strong euro zone, France came to calm Germany with a firm hand, and the recommendation to consider a stronger European governance. Weary the initial exchanges between the two driving forces of Europe rapidly turned into a deaf-mutes’ conversation. The proposal was clearly very European in spirit, but if the outcome was going to be a sort of Nice-Treaty (or Nice-Treachery), the larger UE would be profoundly undermined from within. Germany has leaned with all the weight of its inhabitants to gain more authority in European decisions. A change of paradigm which has caused a crack in the edifice. All this is of greater concern than the Portuguese or Spanish deficits.

“The EU and the Euro Are on the Edge of the Abyss”

2011-11-11T19:51:09Z

A giant of European integration, France’s Jacques Delors, who headed the European Commission between 1985-94 and is considered the founding father of the euro as a single currency for Europe, is not impressed by the eurozone reform proposed at a Franco-German summit in Paris (August 17).

“Open your eyes,” he said in an interview with Swiss and Belgian reporters in Brussels, “the EU and the euro are on the edge of the abyss.” He suggested that only way to avoid falling in is for EU member states to either accept a more robust economic partnership or transfer more powers to Brussels.

Financial observers say the agreement reached between French President Nicholas Sarkozy and German Chancellor Angela Merkel was a political rather than a market-based solution, precisely in order to avoid any transfer of sovereignty.

Sarkozy and Merkel pledged to lay the groundwork for future fiscal union but stopped short of increasing the EU’s Financial Stability Fund (EFSF) to help rescue fragile economies. They also said that a proposal for creating Eurobonds to finance future projects would have to wait.

Delors blamed EU leaders for Europe’s current sovereign debt crisis. “Who is guilty, Greece alone? No, that would be too simple. The responsibility lies with the finance ministers of the eurozone for not calling the authorities in Athens to account… Why was Spain allowed to increase its private debt or Ireland to unduly favor its banks?”

“I am convinced that the general impoverishment resulting from leaving the single currency will exceed the benefits of remaining in it…The euro is a collective adventure. It was mismanaged, so correct it – but stay together,” Delors advised.

“The current risk is that the 17 member countries of the euro, on which all attention is focused, are paralyzing the European project.”

Jacques Delors was in Brussels with his daughter Martine Aubrey, the Socialist Party candidate for the French presidency in 2012, and is expected to be a key advisor during her campaign.

Lagarde Speech Snubbed by Fellow Europeans

2011-11-11T19:50:39Z

Europe has reacted coolly to the demand (August 27) by International Monetary Fund’s new chief, Christine Lagarde, for Europe to inject more money into its capital-starved banks.

In a speech to central bankers meeting in Jackson Hole, Wyoming, the former French Finance Minister took a step away from her government’s official position and warned that “without urgent recapitalization of European banks we could easily see the further spread of economic weakness.”

It was Lagarde’s first public call for Europe to take policy action since she became head of the IMF in early July. Her comments were echoed in a joint appearance with fellow Frenchman Jean-Claude Trichet, President of the European Central Bank. In October Trichet hands the post over to Mario Draghi, governor of the Bank of Italy.

Lagarde said the world economy is in a “dangerous new phase” and warned of a crisis in liquidity. She called on European banks to first seek private resources to recapitalize but to use public funds if necessary, something that is unlikely to be a popular move.

Reacting from Brussels (August 29), European Commission spokesman Amadeu Altafaj said that there was no need for European banks to recapitalize their banks; that banks in the region are better capitalized than they were one year ago.

In July, euro zone leaders agreed to let a 440 billion euro bailout fund finance the recapitalization of banks if necessary. An earlier IMF call for euro zone leaders to increase the size of the bailout fund has been rejected by Germany and France.

Addressing the Jackson Hole summit before Lagarade, US Federal Reserve Chairman Ben Bernanke noted that “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” Although he gave no specifics, Bernanke eased market fears somewhat when he said that the US economy will see better growth in the second half of this calendar year.

There was, in fact, very little discussion of monetary policy at Jackson Hole, normally the subject of central bank summits. But no one complained, perhaps an acknowledgement that the most urgent issues confronting the world today are the euro zone’s sovereign debt crisis and the stalled US economic recovery.

The Future of the European Currency

2011-11-11T19:50:18Z

The most important European project since World War II

David Marsh, one of the most prolific financial journalists in the UK returns to update his account of the European currency. First published in 2009, The Euro was the first comprehensive political and economic summary of the creation and implementation of the currency.

Marsh detailed the jealousies and deal making that brought about the European currency. He also commented on the achievements of the Euro ten years into its enforcement. Why do we have the Euro? What has happened since it was introduced? What could happen next? This new edition particularly emphasizes the recent context of the Euro crisis and the rescue of Greece, Ireland and Portugal via bailout packages. Drawing on many interviews and “behind the scenes” stories, Marsh argues that Europe is fragmenting into opposing blocs of creditor and debtor nations. For him, one thing is sure: the Euro as originally conceived has come to an end. For instance, the rapprochement hoped for between France and Germany, which was supposed to lead to a common political and economic purpose, has yet to emerge. As a sign of this crucial period for the future of the Euro, Marsh changed the title of his book from the Politics of the New Global Currency to the Battle for the New Global Currency.

The Euro has become the second most important reserve currency in the world, especially with the Chinese demand for an alternative to the dollar. Because of this need for another reserve currency in the global economy, Marsh considers that the Euro will continue to survive, although it will be far from fulfilling its original purpose as a stable currency.

The Euro. The Battle for the New Global Currency, David Marsh, Yale University Press, £12.99

–P.L.