A participant at yesterday’s Business Breakfast with Karen Ward asked HSBC’s senior global economist if she could be upbeat in her presentation themed ‘Global Outlook: One Step Forward, Two Steps Back’. She replied she would be honest, opening with: “We are still nearer the start than the end of the eurozone crisis, but we believe the euro will survive.”
Austerity is only causing deeper recessions
In her fourth consecutive annual presentation to members of the business community, Canary Wharf-based Ms Ward examined the fundamental differences between the realities in the developed world and emerging markets, how austerity measures had failed to produce the desired results, and variations in politicians’ and economists’ viewpoints, before offering her own solution to the eurozone crisis.
Ms Ward explained how multiple rounds of quantitative easing had played a small part in injecting some liquidity into the US and UK economies, but both were still struggling to get back on their feet. The US, in particular, had not faced up to its fiscal problems in the way Europe had, seemingly waiting until after November’s presidential election.
The markets, she stressed, were worn down by austerity. When governments stopped spending, austerity began to pinch and tax receipts fell. Governments were forced to deliver more austerity to please the sovereign markets, but austerity was only causing deeper recessions. The lack of growth made debt unsustainable, crippling authorities.
“We are caught in a vicious circle,” Ms Ward said. “We have to talk about growth more in Europe. At the beginning of the crisis, the US realised the banks were the epicentre and sorted them out first, so there was trust among the banks again. This is where Europe has failed. There has been no money to put into the banks. We will not have growth if the banks cannot lend because they are forced to meet ever-higher capital ratios. A credit crunch is just beginning in Europe.”
Until quite recently, Europe’s core was faring better than the periphery, but there were some worrying developments in France’s unemployment numbers. Meanwhile, the scale of job losses in Spain and Italy was making it increasingly challenging for politicians to devise effective strategies.
Very little of Europe was in the black these days, with only Germany holding its own as the continent’s strongest economy and coming in with the lowest unemployment rate in 27 years. Malta, too, had been successful in dealing with the downturn, and the island had the potential to be one of the outperformers in Europe, Ms Ward said.
The two solutions cash-strapped economies had come up with so far were creating more debt under the European Stability Mechanism and the European Financial Stability Facility, suggesting eurobonds and 100-year bonds – or printing more money.
But Ms Ward explained how markets were “happier” with currency risk than default risk, particularly as “inflation is the least of our problems right now. There is no risk of inflation just yet.”
Ms Ward, a former analyst for the Bank of England’s Monetary Policy Committee, offered her own solution to the eurozone crisis, emphasising it was an economist’s answer to the problem.
Firstly, it was imperative that a common fiscal policy was put in place. Each country would then provide a plan for reaching this goal. A governing body – essentially a eurozone treasury – would be set up to monitor progress and formally assess how each country was behaving. Good behaviour would be rewarded with low interest rates, debt relief, and infrastructure bonds from the European Central Bank.
The sticking point of Ms Ward’s ‘solution’ was the implementation of a common fiscal policy, a measure that has been disputed for as long as five years as governments continue to resist attempts at economic co-ordination.
Ms Ward recalled the famous words of Luxembourg Prime Minister Jean Claude Juncker, who in 2007 said: “We all know what to do, but we don’t know how to get re-elected once we have done it.”
Politicians had to admit they could not deliver the living standards they had promised their electorates.
That was not to say that living standards would fall, but it had to be clear to everyone that demographic changes had increased the strain on public finances – aging populations were expensive. Rising commodity prices were not helping, either.
There was, however, reason to be upbeat about the global situation as the structurally sound parts of the world were contributing to global growth of three to four per cent.
Corporate profits were healthy as losses in the developed world were offset by growth in emerging markets. Government debt levels in Brazil, Russia, India and China were low, and the countries boasted 12 per cent wage growth as opposed to two per cent in the developed world.
Admittedly, the wage growth was experienced by economies with low pay packets to begin with, but their new wealth was contributing to real term increases in consumer spending while spending on this side of the world had slowed to snail’s pace.
“Emerging markets will drive global growth well into the 2040s and beyond,” Ms Ward concluded, upbeat about this matter, at least. “There is an opportunity for us in the developed world to satisfy their demand.”