Last week a number of European public figures joined the ranks of those calling for renewed emphasis on growth. The most remarked was Mario Draghi during his audition before the European Parliament; but equally important was the joint statement of Mario Monti and Manuel Barroso. “Growth” seems to be the word of the month, a must in any European leader’s speech.
I will certainly not complain, about this, because both the reduction of unemployment and the sustainability of public finances in the eurozone simply cannot happen in stagnant economies. Nevertheless, once more, there are some reasons for being worried. At a close look, it seems as if the word were an empty box, simple lip service paid to public opinion in order to keep doing business as usual.
The latest IMF World Economic Outlook came out last week. It has lots of interesting remarks on the European austerity. Remarkably enough, it poses the problem of timing: fiscal consolidation, if too hasty, may end up being counterproductive. I played a little with the data accompanying the report, including the forecasts.
Not that he needs it, but I feel I must advertise this New York Times editorial by Paul Krugman, on the looming European catastrophe. As usual, it is masterly written. I just want to add one remark: The economic suicide of Europe happens because of ideological blindness. We are trapped in a doctrinal approach to economics and economic policy. There is nothing you can do against fundamentalism.
Should the title of this blog change from Gloomy to Desperate?
I just published an editorial on the Italian daily il Corriere Della Sera (in Italian), that summarizes my views on the causes of the crisis and of global imbalances. It is a reprise of one of my first posts, written with Jean-Paul Fitoussi. It is useful to summarize and refresh the argument:
Martin Wolf has a very interesting piece on China’s attempt to rebalance its growth model from exports to domestic demand. Wolf remarkably shows how this attempt has been going on for at least a decade, with unequal pace, and several stop-and-go. I’d add that the crisis itself played a contradictory role. China on one side was one of the first countries in 2009 to implement a robust stimulus plan amounting to more than 10% of GDP; on the other, it did not resist (as most countries) more or less hidden protectionist measures and currency manipulation. Wolf concludes that, while successful, the rebalancing from external to domestic demand led to excessive (and not necessarily productive) investment. The new rebalancing challenge of China lies in increasing income and consumption of its population.
What I take from this is that China fully grasps its new role in the world economy. Its leadership understood long ago that the transition from developing/emerging economy to fully developed economy needed to pass among other things through less dependence on exports. A large dynamic economy cannot rely on growth in the rest of the world for its prosperity. Even the debate on reforming the welfare state and on health care had as one of his reasons the necessity to reduce precautionary savings. The rebalancing act is long and unsteady, but definitively under way.
It is also worth noticing that a better balance between domestic and external demand in the large economies is crucial element in reducing the macroeconomic fragility of the world economy through decreasing trade imbalances.
It is striking, in contrast, how Europe remains trapped in a sort of small country syndrome. The “Berlin View” permeating the Fiscal Compact advocates fiscal discipline and domestic demand compression, in order to improve competitiveness and to foster export-led growth. Besides the fact that it is not working, this is equivalent to tying Europe’s fate to the performance of the rest of the world, giving up the ambition of being a major player in the world economic arena. What a difference with the ambition and the forward looking attitude of China…
A picture of Germany somewhat different from the recent past emerges from two articles in the Financial Times of March 30:
- The first shows that, in a framework of decreasing unemployment, Germany’s domestic demand shows signs of vitality. Investment, and more remarkably consumption, increased moderately in 2011 and are forecasted to continue this year. Contrary to what happened in 2009-2011, most of growth for 2012 should come from domestic demand. This goes with (finally!) increasing wages, and some signs of price increases.
- The second article reports discussions on the ratification of the fiscal compact, with some parties in the Bundestag calling for a stop to austerity and for more solidarity towards troubled countries.
This does not mean that the overall stance of Germany will become openly expansionary, as would be sorely needed. But it is at least an indicator that the German domestic context is less monolithic than it used to be. This cannot be bad…