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Posts Tagged ‘fiscal compact’

Rebalancing and Small Europe

April 5, 2012 5 comments

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…

Something is Moving?

April 1, 2012 Leave a comment

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…

Go West and Take the Best

March 7, 2012 2 comments

Paul Krugman has an interesting piece on federal and local expenditure in the United States, where he shows that the consolidated fiscal stance has been considerably more restrictive with Obama than during the Reagan era. This is not what retained my attention, nevertheless. Krugman does not mention that most of the US states (the exception being Vermont) have some form of balanced budget amendment. Krugman himself had warned a while ago that this made the task of the federal government in fighting the recession particularly hard. But once again, this is not the point I want to make.

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On Fiscal Rules and the Need for Reforming the Stability Pact

February 27, 2012 1 comment

I recently wrote a paper with Jerome Creel and Paul Hubert, in which we try to assess the impact of the different fiscal rules that are being discussed for reforming the Eurozone governance. For our simulations we took into account the standard Keynesian positive effects of deficit spending: Government expenditure substitutes missing private demand, and hence supports economic activity. But we also embedded a negative effect of deficit and debt, that goes through increased interest rates (the famous spreads). High interest rates make it harder for the private sector to finance spending, and hence depress aggregate demand and growth. We assessed the performance of the rules in terms of average growth over the next 20 years.

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