The Great Debate UK

from The Great Debate:

An unstable global economic system that is being ignored

Today, the International Monetary Fund announced yet another a reduction in its global growth projections for 2014, with its estimate of U.S. growth also reduced (citing reduced government spending, but not the present U.S. government shutdown -- or the heretofore unthinkable notion of the U.S. government defaulting on its obligations). Despite the seeming urgency of global economic slowdown, when world leaders attended their annual fall confabulation at the United Nations in New York last month, they focused on the diplomacy of physical security (Syria, Iran, etc.). Thus another year has passed in which global economic security issues were on no one’s reported agenda.

Policy makers continue to fail to appreciate that the most formidable economic challenge today lies in the area outside the borders of any one nation or region -- and that multilateral action to address this challenge is arguably more important than efforts at increasingly less-effective internal stimulus.

Present-day economic imbalances -- particularly those stemming from the rapid emergence of the post-socialist nations over the past 15 years, with their associated supply of excess labor, productive capacity and global capital, relative to demand -- have hamstrung the economies of the advanced nations. Such economic dislocation can no longer be resolved by any one power, or even by two or three. Indeed, there is enormous risk today of unilateral or bilateral actions being viewed by players left out of such actions as economically threatening or even hostile, leading to economic countermeasures. The issue is compounded by the complexity of the relationships among and between developed nations on the one hand and emerging ones on the other. It is hard to imagine moving beyond a global economy that is just getting by, and therefore at material risk of new and deeper crisis, without a more open dialogue among the Group of 20 (G20) nations and proactive steps toward mutual accommodation.

Yet, since the central banks of the developed world have managed to more-or-less stabilize their economies -- however tenuously -- discussion of a global grand bargain focused on rebalancing international trade and finance has been all but absent. This is unfortunate, as it makes it unlikely that the advanced nations will be able to return to their potential growth trajectories for some time to come.

Don’t Mention the War!

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–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–

Modern wars have no clear start and no clear end, leaving politicians free to deny their existence when it suits them and to claim victory even in the face of obvious defeat.

from The Great Debate:

Stubborn national politics drag down the global economy

Four years ago world leaders, meeting in the G20 crisis session, agreed they would all work to move from recession to growth and prosperity.  They agreed to a global growth compact to be delivered by combining national growth targets with coordinated global interventions. It didn’t happen. After the $1 trillion stimulus of 2009, fiscal consolidation became the established order of the day, and so year after year millions have continued to endure unemployment and lower living standards.

Only now are there signs that the long-overdue shift in national macro-economic policies may be taking place. The new Japanese government is backing up a "minimum inflation target" with a multi-billion-dollar stimulus designed to create 600,000 jobs. In what some call the “reverse Volcker moment,” Ben Bernanke has become the first head of a central bank for decades to announce he will target a 6 percent level of unemployment alongside his inflation objective. And the new governor of the Bank of England, Mark Carney, has told us that "when policy rates are stuck at the zero lower bound, there could not be a more favorable case for Nominal GDP targeting.” Side by side with this shift in policy, in every area but the Euro, there is also policy progress in China. It may look from the outside as if November’s Communist Party Congress simply re-announced their all-too-familiar but undelivered wish to re-balance the economy from exports to domestic consumption, but this time the promise has been accompanied by a time-specific commitment: to double average domestic income per head by 2020.

from The Great Debate:

The perils of protectionism

By Gordon Brown
The views expressed are his own.

Next week's 2011 G20 meeting has the power to write a new chapter in the response to the economic downturn. But every day, as nations announce currency controls, capital controls, new tariffs and other protectionist measures, the G2O’s room for maneuver is being significantly narrowed. Already the cumulative impact of a wave of mercantilist measures is threatening to turn decades of globalization into reverse, returning us to the economic history of the 1930s, and condemning at least the western parts of the world to a decade of low growth and high unemployment.

Three years ago when the financial crisis first hit, the G2O communiqués were explicit in warning of the dangers of a new protectionism. Led by the head of the World Trade Organization (WTO), Pascal Lamy, we embarked on a forlorn attempt to use the crisis to deliver a world trade deal -- and were frustrated by an irresoluble dispute on agricultural imports between two countries, India and the USA. But now, in the absence of any co-ordinated global action, member countries have been retreating into their national silos -- and the trickle of protectionist announcements threatens to become a flood. Switzerland led costly action to protect its overvalued currency and has been followed by currency interventions in Japan (with perhaps more to come), India, Indonesia, and South Korea. Brazil, which had itself warned of currency wars, then imposed direct tariffs on manufactured imports -- a hefty car tax designed to protect its own native auto industry against emerging market imports. Other countries are now considering mimicking them. Capital controls are also now in vogue, and of course the U.S. Senate has just voted to label China a “currency manipulator.”

from The Great Debate:

How Europe can stave off a crisis

By Gordon Brown
The views expressed are his own.

It was said of European monarchs of a century ago that they learned nothing and forgot nothing.  For three years, as a Greek debt problem has morphed into a full blown euro area crisis, European leaders  have been behind the curve, consistently repeating the same mistake of doing too little too late. But when they meet on Sunday, the time for small measures is over. As the G20 found when it met in London at the height of the  2009 crisis, only a demonstration of policy intent that shows irresistible force will persuade the markets that leaders will do what it takes. An announcement on a new Greek package will not be enough. Nor will it be sufficient to recapitalize the banks. European leaders will have to announce a comprehensive -- around 2 trillion euro -- finance facility; set out a plan to fundamentally reform the euro; and work with the G20 to agree on a coordinated plan for growth.

For three years it has suited leaders across Europe to disguise Europe’s banking problems and, citing the blatant profligacy of Greece, they have defined the European problem as simply a public sector debt problem. And it has suited Europe’s leaders to call for austerity (and if that fails, more austerity) and forget how the inflexibility of the euro is itself dampening prospects for growth, keeping unemployment unacceptably high and weakening Europe’s competitive position in the world today. Indeed, Europe’s share of world output has now fallen to just 18 percent.  And it is a measure of how it is losing out in the growth markets of the future that just 7.5 percent of Europe’s exports go to the emerging markets that are responsible for 70 percent of the world’s growth.

from The Great Debate:

The great global rebalancing and its implications

Manoj Pradhan

Alan M. TaylorManoj Pradhan, left, a global EM economist, is an executive director at Morgan Stanley. Alan M. Taylor, right, a senior advisor at Morgan Stanley, is a professor of economics at the University of California, Davis. The opinions expressed are their own.

Policymakers have fretted about global imbalances for nearly a decade, but little consensus or clarity has emerged. Some saw problems created by surplus countries, others deficit countries. Many feared a fiscal-cum-balance of payments crisis in the U.S., but the crisis we got reflected private/financial failures. G20 proposals for collective action remain a work in progress. Uncoordinated policy actions triggered talk of currency wars.

from Global Investing:

Russia’s babushka time-bomb

The babushka, that embodiment of Russian grandmotherly goodness that has spawned iconic dolls and inspired a Kate Bush song, poses one of the gravest threat to the Russian economy.

Moscow-based investment bank Renaissance Capital also expects this segment of the demography to spur politically risky pension reforms.

To spend, or not to spend?

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-Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.-

There is really only one question on the agenda at the G8 and G20 meetings in Toronto and in policy circles throughout Europe and North America: to cut government spending and risk recession; or to keep on spending, risking a return to inflation, or more likely to stagflation – inflation with stagnant economic activity?

G20 Toronto Summit: unexciting, but constructive?

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-Paola Subacchi, Research Director, International Economics, Chatham House, London. The opinions expressed are her own.-

The G20 summit in Toronto is not expected to create much excitement, and it never was. It comes after an intense summitry year and two meetings  – held in 2009 in London and Pittsburgh – that are difficult acts to follow.

False dawn or risk recovery?

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-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

What began at the start of the year with an acknowledgement from Greece that it had been living way beyond its means soon turned into a more universal re-appraisal of the risks of sovereign default.

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