By Martin Hutchinson and Christopher Swann

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

The IMF is courting disaster in Romania. The fund’s draconian conditions led Bucharest to cut public sector wages by 25 percent, far more than elsewhere. Now Romania’s prime minister Emil Boc has resigned and anti-reform forces have been emboldened. Excessive IMF rigour could do lasting harm.

The fund has been trying to soften its fearsome reputation. Managing Director Christine Lagarde has argued that the IMF should be less harsh, admitting that “consolidating too quickly can hurt the recovery and worsen job prospects.”

Sadly, in its treatment of Romania the IMF lived up to its old blood-sucking reputation. The lender’s demands included 100,000 job cuts, as well as steep cuts in salaries and a hefty rise in VAT, which hits the poor directly. Such harsh measures may prove self-defeating. By strengthening anti-market political forces, the IMF may end up pushing Romania away from the policies it encourages.

Romania does not obviously need extreme measures. While its current account deficit reached 14.5 percent of GDP in 2007 (less than Latvia, Bulgaria and Estonia), it has alleviated the problem with a 30 percent devaluation of the leu in 2007-09. Its public spending at 36 percent of GDP is not excessive.

Crude fiscal austerity fails to address Romania’s endemic corruption and other structural economic problems, which help keep the country’s GDP per person the second lowest in the EU. The IMF could help the country deal with the dreadful legacies of the odious Ceausescu regime. Instead, its harshness risks undermining Romania’s fragile democracy – street protests helped bring the government down.

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The U.S. private sector is emerging from government’s shadow. Headline annualized GDP growth of 2.8 percent in Friday’s fourth-quarter data looks more anemic when inventory growth is netted out. But overall in 2011, as government has retreated private enterprise has regained strength.

At first glance, the first estimate of fourth-quarter economic growth was disappointing. The headline number was below the consensus forecast, while nearly two percentage points of growth were represented by inventory accumulation, generally considered a negative factor since it isn’t usually sustainable. Personal consumption expenditures were subdued, growing at just 2 percent, as was non-residential fixed investment, at 1.7 percent.

But on closer inspection the figures were stronger than they looked. Relatively weak final sales and domestic consumption followed surges in those factors in the previous quarter, while the inventory build-up followed a previous quarter drawdown, thus probably holding few negative implications for the future.

Moreover, government has been shrinking and the private sector correspondingly strengthening. For 2011 as a whole U.S. GDP grew by only 1.7 percent. But gross private product, which excludes government expenditure, grew by 2.7 percent. In the fourth quarter, the private sector grew at a robust 4.5 percent annual rate, while government shrank at both the federal and state and local levels.

Inflation was also subdued during the quarter, presumably affected by the decline in resource prices in the autumn. For 2011, the price index for personal consumption expenditures, Federal Reserve Chairman Ben Bernanke’s favorite inflation metric, grew at 2.4 percent, a restrained level – if still 0.4 percentage point above the Fed’s newly stated target.

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The U.S. Federal Reserve could be setting itself up for an uncomfortable surprise. It extended its commitment to keep interest rates near zero from about 18 months to three years on Wednesday. Job creation, the departure of Chairman Ben Bernanke or rising inflation could force a damaging reversal before then – or lead the Fed to drag its feet to avoid one.

In his press conference, Bernanke said that with the fed funds rate at zero the U.S. central bank had two means of affecting monetary policy, namely securities purchases and guidance. By pushing out the date when it expects rates to start going up from mid-2013 to late 2014, the Fed has potentially reduced yields on long-term paper.

Bernanke also outlined the Fed’s long-run goals and policy strategy, setting a soft inflation target of 2 percent, based on the annual change in the price index for personal consumption expenditures. He noted that a hard target would be incompatible with the Fed’s dual mandate, which includes promoting full employment as well as minimizing inflation.

The U.S. unemployment rate was 8.5 percent in December, down 0.6 percentage point since August. Should that pace of improvement continue, unemployment would reach the Fed’s estimated “normal” range of 5.2 percent to 6 percent by mid-2013 – well before Bernanke’s new zero-rate end date.

Meanwhile, the PCE price index was up 2.5 percent in November from the previous year. Given that’s already above the Fed’s soft target, it seems likely that inflation will rise sufficiently within the next three years to warrant an interest rate rise. Finally, Bernanke’s own term of office ends in January 2014. This year’s elections may determine whether he will get another term, and a different chairman could spearhead a very different policy.

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The U.S. recovery is no longer jobless – only homeless. Despite the 200,000 jobs added last month and another drop in unemployment, job creation is still slower than in recent recoveries. That’s partly because the weak housing market means few new construction jobs. Still, President Barack Obama can breathe easier.

Job gains were broadly spread, according to Friday’s report for December, with all major sectors except the government adding jobs and the unemployment rate declining to 8.5 percent, albeit partly due to another 50,000 people leaving the workforce. At this level, job creation is sufficient to absorb U.S. population growth and the headline unemployment rate is on track to decline further, potentially boosting Obama’s re-election chances in November.

Even so, the 1.6 million overall figure for jobs added in 2011 – combining 1.9 million new jobs in the private sector and cuts in government – lags even the relatively feeble recovery of the early 2000s. In 2004, for instance, over 2 million jobs were created. Approaching 3 million were added in 1993, and even more than that in 1983.

The continuing deep slump in the housing market is partly to blame. The construction sector added only 47,000 jobs last year, compared with close to 300,000 in both 2004 and 1993. More than 2 million construction jobs have evaporated since 2007, and the sector’s job count is back to its level in 1996, when the population was smaller.

Today’s modest but steady job growth with construction largely missing out resembles the post-recession pattern of 1961 to 1963, when total job gains averaged 1.2 million annually, only 73,000 of them in construction. That sluggish recovery was decried at the time and helped trigger President John F. Kennedy’s tax cut, finally enacted under Lyndon Johnson in February 1964. After that, recovery quickened into one of the last century’s strongest periods of growth.

The tax cut idea might not appeal much to Obama – and, to be fair, Kennedy was starting with a top marginal income tax rate of 91 percent. That aside, the current president might fancy the comparison with his iconic predecessor and with late 1960s growth just as much as he appreciates monthly job reports like this one.

By Martin Hutchinson and Edward Hadas The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

After a century-long nap, I awoke in 2012. The world is changed, but not utterly.

Much happened between 1912 and my new now. The fragile European peace I remembered was broken by huge wars and then restored, but the can-do spirit of my earlier era is hardly present in Europe and – this really surprised me – is in decline in the United States.

In some ways, though, the world feels familiar. Passports are not necessary for travel in much of Europe, and capital movements are almost entirely free. Foreign investment takes up a comparable share of GDP (a useful measure that we did not have in my old life). And while the great powers have changed, I find it easier to understand the multiple competing blocs than the nap-time arrangements of Cold War stasis and unipolar dominance.

I’m delighted with all the new technology, but not too surprised (I used to read what is now called science fiction). Modern pharmaceuticals, computers and the Internet all surpass my pre-sleep dreams. But I have to admit to some disappointments: planets are not colonized and people still rarely live past 100 years.

One thing really bothers me – the expansion of governments. This whole “welfare state” business may sound good, better welfare than warfare and all that, but states are expected to do much too much. I’m not surprised that governments don’t seem to manage very well, either their operations or their finances.

Maybe that judgment reflects my training as a banker; I love sound money and strong markets. And that’s another thing I don’t like about the new world order – the financial system. Why on earth did they abandon the Gold Standard? With governments in total control of the monetary system, inflation and financial crises are inevitable.

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Bundesbank’s forecast of a German economy growing a paltry 0.6 percent in 2012 may be pessimistic. If the euro zone stays in place, its troubles may redound to Berlin’s advantage. The euro will stay weak, while Germany will enjoy a finance cost advantage over its neighbours. Next year may thus see German exports surging and economic growth resilient.

Germany’s economic trajectory in 2012 depends on the euro zone’s fate. If it undergoes an orderly split, Germany may lose competitiveness as its part of the euro strengthens against other currencies. If the euro breaks up altogether, massive European debt defaults may cause a Europe-wide recession severe enough to drag down even resilient Germany. If, however, the euro remains in place – which currently appears most likely, even if possibly losing Greece and/or Portugal – Germany will be in an excellent competitive position. Both France and southern Europe, important competitors, will suffer financing costs significantly above German levels, while the euro will remain weak enough to keep German exports competitive in the United States and world markets.

Given this reality, the Bundesbank growth forecast looks too low. While public sectors may well suffer increased financing costs, Germany has a projected budget deficit of less than 1 percent of GDP and hence will suffer less from this than its neighbours.

Global growth is projected at 4 percent in 2012, while U.S. growth appears more resilient than a few months ago. Hence German exports should continue growing at a healthy rate. Domestically, gross wages are expected by the Bundesbank to rise by about 5 percent this year and 3 percent in 2012, while unemployment is forecast to continue declining. That should bolster demand and counterbalance modest public sector austerity. Both internationally and domestically, German growth should prove the Bundesbank’s caution excessive.

There are risks to this forecast. Even if financial collapse is avoided, the euro zone’s demands on Germany’s public purse could weaken its economic position, while calls for Germany to reduce its export surplus also threaten. But Chancellor Merkel, facing a difficult election in 2013, has become an expert in saying “Nein”. That’s a crucial skill to preserve the health of the German economy.

Predictions: Breakingviews is publishing a series of articles over the holiday that look ahead to 2012. The pieces will be collected together in the annual ’Predictions Book’, produced in print and electronic form early in the New Year.

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

U.S. President Barack Obama’s new Federal Reserve governors may bring new policy solutions. He may have laid a clever election-year trap by nominating the party-balanced pair of Jeremy Stein and Jerome Powell to the central bank’s vacant posts. Both are well qualified. Moreover, Stein’s views on financial regulation may even help watchdogs like the Fed to prevent future MF Globals from emerging.

Politically, Obama’s move is canny. He apparently balances the political parties, while nominating Powell, the Republican, only until January 2014 and Stein, the Democrat, until 2018. By doing so, he challenges Senate Republicans to block the nominations and show themselves partisan and obstructive, while reserving the right to replace Powell when his term ends shortly after his own re-election.

On substance, both men are highly qualified, and from their record likely to support Fed chairman Ben Bernanke’s loose-money policy. Powell’s connections to Carlyle, the most politically-minded major private equity group, and his donations to GOP candidates Mitt Romney and Jon Huntsman, suggest he won’t rock the boat on policy.

Stein, a Harvard professor, has a monetary policy specialization and a published track record. In particular, in a recent paper he suggested that Fed regulatory policy should address the problem of excessive leverage in the shadow banking system by extending reserve requirements to it. This would, for example, address the problem at MF Global, the failed Wall Street firm whose London subsidiary appears to have created chains of repurchase agreements, using client funds. By having some control over non-bank financial borrowing, the Fed could reduce both overall systemic leverage and the incentive to move assets into the shadow banking system.

Adding Powell and Stein to the Fed board won’t do much to transform the Fed’s current stimulative monetary policy. But Stein’s ideas, if implemented, could mitigate some of that policy’s potentially bubbly side effects. Wall Street might not view that as a positive, but it’s hard to see on what basis legislators could object to giving either man the job.

Predictions: Breakingviews is publishing a series of articles over the holiday that look ahead to 2012. The pieces will be collected together in the annual ’Predictions Book,’ produced in print and electronic form early in the New Year.

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

David Cameron’s veto of the new EU fiscal arrangements should reopen the debate on the UK’s relationship with the EU. Euro zone membership is politically inconceivable but unless the tone of the debate changes it is likely to be treated by other members as a pariah or even a traitor. There is an alternative – the European Economic Area.

The EEA was established in 1992 as a sort of half-way house between full membership in what was then called the European Community and total autonomy. EEA countries participate fully in the common market and have to follow the EU rules and regulations which keep markets free. But they do not participate in the governance of the Union. As far as other European matters go, they can more or less pick and choose whether to participate.

It’s not a bad economic deal, but the group has shrunk as its founding members joined the EU. The EEA today is only Norway, Lichtenstein and Iceland, with Switzerland legally out but practically in. The UK would be a natural. By leaving the EU, it would save most of its annual 10 billion pound contribution, a sum which could rise by 50 percent if irritated members carry out their threats to its rebate. UK governments would have less at stake in arguments with continental governments they don’t really understand.

Of course, outside the EU, Britain would have even less influence on European decision-making. That decline would be felt in financial markets: euro bond and currency trading would probably migrate to inside the euro zone. But then again, the current arrangement is artificial. Strictly euro business would probably leave London anyway. In higher value-added businesses such as global finance and asset management, London will stay strong as long as the City keeps its skills edge.

The challenge would be to make the transition to the EEA amicable. But it is worth making an effort to keep the benefits of the EU’s large market while minimising costs, friction and bureaucratic meddling. Quietly and non-confrontationally, the EEA should be Britain’s goal.

By Martin Hutchison The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

To celebrate Chairman Ben Bernanke’s birthday on Tuesday, the Fed gave the world no new stimulus. With U.S. unemployment down in November to 8.6 percent and fourth-quarter growth forecasts revised upwards, the central bank’s latest statement zeroed in on global problems, particularly in Europe. More notably, it didn’t introduce a “QE3” program of further Treasury bond purchases. Under such conditions, and with money supply strong, Bernanke’s gift of low rates to markets may expire by the time he turns 59 in December 2012.

Since Fed policy is exceptionally accommodating both in terms of interest rates and monetary stimulus, and the U.S. economy has shown significantly more robustness of late, the bank needed to find further justification for not tightening. The euro zone crisis provided it, along with slowing worldwide growth – though there was no hint of an early resort to further unmatched Treasury bond purchases, as some Fed watchers had expected. On the face of it, there should be little policy change before mid-2013, when the Fed’s commitment to near-zero rates expires.

Markets may force a rethink sooner than that, however. While consumer prices dipped in October, their 12-month rise is still 3.5 percent and oil prices are at nearly $100 a barrel. More ominously, M2 money growth was 9.8 percent in the last year, more than twice the four-quarter rate of growth in nominal GDP, suggesting inflationary pressures may be building.

The capital market distortion from heavily negative real interest rates is also more evident, producing increased risk of a “credit crunch” through capital misallocation. Thus, well before Bernanke blows out the candles again, the Fed may need to reverse course on rates, even if it also needs to provide yet more liquidity to the financial system after too many “gapping” games of borrowing short-term and buying long-term government-guaranteed bonds – instead of lending more to productive industry. That would be an unexpected, but welcome, present.

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Occupy Wall Street protesters may not know much about Coxey’s Army. But like the current demonstrations, Jacob Coxey’s 1894 March on Washington occurred after a period of economic turmoil that increased inequality and followed a crash of the financial system. Mr. Coxey failed, but his demands of stimulus spending and printing money became the standard response to recessions. Occupy Wall Street should be so lucky.

Economically, the lead-up to 1894 bore considerable resemblance to the present. In the preceding boom years, disruptive technologies like the transcontinental railroad and refrigeration brought prolonged downward pressure on prices. Since America was on a gold standard, this resulted in about 20 percent deflation in consumer prices. As in the past decade, when American manufacturing workers saw their living standards eroded and employment opportunities diminish, farmers of the late 19th century were especially adversely affected, and income differentials widened.

The financial crash of 1893 resembled that of 2008, with similar distress in the financial sector, but caused more corporate bankruptcies and higher unemployment. It also brought a severe credit problem. To avoid running out of gold in early 1895, America sought a bailout from J.P. Morgan.

Mr. Coxey, a successful businessman with Populist Party connections, began his march with 100 participants from his home town of Massillon, Ohio. They demanded federal deficit spending on roads and other public works, with laborers paid in paper money, thus expanding the currency in circulation.

A generation before John Maynard Keynes espoused his theories, the protesters found little response to their ideas in the conservative administration of Grover Cleveland. The march was eventually dispersed with little short-term effect. Mr. Coxey’s prescriptions, however, have since become conventional wisdom, notably in the fiscal and monetary responses to the most recent downturn.

Occupy Wall Street arises from a similar situation, when technology-driven deflation has widened income gaps and produced a stratum of economic losers. In that respect, it does not resemble, say, 1932, when distress was general, or even 1968, a period of great prosperity. But like Mr. Coxey’s followers, Occupy Wall Street could influence the debate for decades ahead. It just needs some ideas.