Straight from the Specialists
(Any opinions expressed here are those of the author and not of Thomson Reuters)
That custodian of the English language, the Oxford English Dictionary, describes a bubble as “anything fragile, unsubstantial, empty or worthless; a deceptive show”. Could this description apply to the current frenzy for “reform” that is seemingly sweeping the global economy? The answer is “yes, in part”. While there are some genuine attempts at reform, market expectations for reform will inevitably be disappointed in some parts of the world.
The global financial crisis has prompted politicians to advocate economic reform in two ways. First, the crisis demonstrated that the status quo needed to be changed — and in many cases that change required sizeable structural change. Second, as the structure of the world economy has changed (lower global capital flows, slower global trade, etc.) so economies have had to adapt the way that their economies are structured.
The inevitable reaction to this is that politicians are scrambling over each other to advocate reform. Reform is seen as a break with the past, and helps governments avoid being tainted with past errors. Advocating reform is a way of containing popular anger about historical mistakes. Looking at the focal points of fiscal, labour market and financial system structures, almost three quarters of the world economy as measured by GDP is assessed as needing some kind of reform in one or another of these areas.
In some cases, the need for reform is seen as being very broad based. Japan’s need for fiscal and labour market reform is at least recognised (though perhaps not put into practice) by Abenomics. The Euro area’s need for a credible change in its banking system structure has been acknowledged by giving the central bank the power to regulate banks, though this is still seen as incomplete.
(This piece comes from Project Syndicate. The opinions expressed are the author’s own) For the last few years, economists have been running through the alphabet to describe the shape of the long-awaited recovery — starting with an optimistic V, proceeding to a more downbeat U, and ending up at a despairing W. But now a deeper anxiety is beginning to stalk the profession: the fear of what I call an “L-shaped” recovery.