You do not have to go far to hear that financial hard times are over in 2014. But no one looking around the global economy could possibly miss the work still undone. Some see potholes deep enough to send the recovery bus off the road.
Europe, China, and Japan, the emerging markets: The temptation is to overlook formidable things to do out of sheer relief that the worst of the crisis that began in 2009 is behind us. Maybe it is, but healthy recovery is not a given. The third quarter gains of 2013 could easily prove Pyrrhic. In any case, there were defeats that got too little of our attention.
I vote to call this the Year of Political Economy. It is a 19th century European term; Americans tend to shy from it because markets and politics are supposed to be autonomous of one another. But we will not do well in 2014 unless we recognize political economy as the true name of the game.
In Europe, the threat already evident is “secular stagnation”—slow growth and undesirable low inflation. Mario “Whatever It Takes” Draghi, the European Central bank president, is assiduously avoiding the “D” word but he is boning up on “Japanification”—a long agony of deflation—and there can be but one reason for this course of study.
Europe has saved the union and the currency but at huge cost. Faith in Brussels and attendant institutions is collapsing as we speak; social and political problems loom like swamp monsters. There is consensus among commentators that the rise of the far right, always nasty in the European context, is a danger. But the technocrats and politicians seem almost willfully impervious—or maybe paralyzed.
Addressing these realities is not (or not only) a political or moral question—it is a matter of good economics. Neoliberalism is a set of ideas, or an ideology, but not an ever-reliable life raft. It is sophistry to look at frail recoveries in Britain and elsewhere and declare austerity a success. There is little cause for faith in, say, the Spanish economy’s resilience so long as joblessness is above 25 percent and the young are a “lost generation.”
China has to come off a huge credit bubble and it cannot defer much longer. The danger is the landing will not be soft. Just before the year turned, Beijing declared that cities can issue new bonds—effectively allowing them to roll over unsustainable public-sector debt.
The mandarins may sit atop a command economy, but they do not seem to know their next move. Always in the background is the threat of political instability, which this columnist considers inevitable at some point.
The engineering feat facing Beijing requires maintaining growth near 7 percent while reducing debt that came in at 56 pct of GDP at mid–2013. Can this be done, even as the mainland shifts to greater domestic consumption?
Simon Rabinovitch, an FT blogger, tells us municipal debt has grown sevenfold in the past three years, to give an idea of where the momentum lies. Forty percent of this debt (spent on growth-generating infrastructure projects not producing revenue) falls due this year.
On the geopolitical side, just to keep things simple, a settlement with the U.S. now grows urgent. That near collision before Christmas of an American surveillance ship and a Chinese carrier escort—purposeful on the Chinese navy’s part—lends this matter flashpoint status. There’s one way out: Washington will have to leave behind old claims to supremacy in the western Pacific and get with 21st century realities.
Cheers for the “Abenomics” experiment in Japan, well, cheers at half time, anyway. Haruhiko Kuroda, Prime Minister Shinzo Abe’s central banker, told the Financial Times that Abe is winning the war against more than a decade of deflation.
Inflation is now 0.9 percent—the target is 2 percent, hence half time—and Kuroda expects to meet his Monetary Policy Committee’s forecast: 1.9 percent inflation in the fiscal year beginning April 1. “We intend to achieve the 2 per cent inflation target and maintain it in coming years,” Kuroda added with evident bullishness.
Pessimists say either it cannot be done because the deflationary trench is too deep or that Kuroda will overshoot into hyperinflation. Both dangers are overstated; pessimists on Japan almost always err in underestimating the acuity of Tokyo’s technocrats.
The third line of argument says that Abenomics cannot succeed without structural reforms. Do not wait for many of these. Ideas such as “flexible labor markets” are simply not in the culture, and hence are political hot potatoes. A lot of people do not get this. Calling things by name—in this case “hire-and-fire” would do—makes for more realistic expectations.
Abe wants the economy to grow as part of his ambition to restore the nation’s pride. And he is correct that Japan must re-articulate itself for the 21st century. But his “new nationalism” is very yesterday.
Now he is back at Yasukuni Shrine and reviving the old “textbook wars,” as I used to call them. This guy could prove a de-stabilizing force in the region, even as he does not reflect prevailing sentiment among the Japanese. Good economics at home, bad geopolitics beyond his shores.
Finally, the emerging markets. This picture is mixed at best. Countries such as India, Brazil, and Indonesia could all face credit crises as the Fed gets its “tapering” policy under way. Look at the list: Modest contributors to global GDP, large contributors to global population, and all among the middle-income nations expected to add fuel to the world’s economic engine. The new theme in the big-think set is global convergence. We cannot miss this in 2014.
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