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Searching for a glimmer of global economic hope
By Nouriel Roubini |
April 11, 2013, Thursday
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IN the last few weeks, I have traveled to Sofia, Kuala Lumpur, Dubai, London, Milan, Frankfurt, Berlin, Paris, Beijing, Tokyo, Istanbul, and throughout the US. As a result, the myriad challenges facing the global economy were never far away.
In Europe, the tail risk of a eurozone break-up and a loss of market access by Spain and Italy were reduced by last summer's decision by the European Central Bank to backstop sovereign debt.
But the monetary union's fundamental problems - low potential growth, ongoing recession, loss of competitiveness, and large stocks of private and public debt - have not been resolved.
Moreover, the grand bargain between the eurozone core, the ECB, and the periphery - painful austerity and reforms in exchange for large-scale financial support - is now breaking down, as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands.
Austerity fatigue in the periphery is clearly evident from the success of anti-establishment forces in Italy's recent election; large street demonstrations in Spain, Portugal, and elsewhere; and now the botched bailout of Cypriot banks, which has fueled massive public anger. Throughout the periphery, populist parties of the left and right are gaining ground.
Bailout fatigue
Meanwhile, Germany's insistence on imposing losses on bank creditors in Cyprus is the latest symptom of bailout fatigue in the core.
Other core eurozone members, eager to limit the risks to their taxpayers, have similarly signaled that creditor "bail-ins" are the way of the future.
Outside the eurozone, even the United Kingdom is struggling to restore growth, owing to the damage caused by front-loaded fiscal-consolidation efforts, while anti-austerity sentiment is also mounting in Bulgaria, Romania, and Hungary.
China's problems are many: imbalances between its coastal regions and the interior, and between urban and rural areas; growing income and wealth inequality; and massive environmental degradation.
Farther east, Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence.
"Abenomics" has several components: aggressive monetary stimulus by the Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in 2014 to rein in deficits and debt; a push to increase nominal wages to boost domestic demand; structural reforms to deregulate the economy; and new free-trade agreements - starting with the Trans-Pacific Partnership - to boost trade and productivity.
Daunting challenges
But the challenges are daunting.
It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable; and the structural-reform components of Abenomics are vague.
In this fragile global environment, has America become a beacon of hope? The US is experiencing several positive economic trends: housing is recovering; shale gas and oil will reduce energy costs and boost competitiveness; job creation is improving; rising labor costs in Asia and the advent of robotics and automation are underpinning a manufacturing resurgence; and aggressive quantitative easing is helping both the real economy and financial markets.
But risks remain. Unemployment and household debt remain stubbornly high.
The fiscal drag from rising taxes and spending cuts will hit growth, and the political system is dysfunctional, with partisan polarization impeding compromise on the fiscal deficit, immigration, energy policy, and other key issues that influence potential growth.
Nouriel Roubini is professor of economics at the Stern School of Business, NYU. Copyright: Project Syndicate, 2013. www.project-syndicate.org. Shanghai Daily condensed the article.
In Europe, the tail risk of a eurozone break-up and a loss of market access by Spain and Italy were reduced by last summer's decision by the European Central Bank to backstop sovereign debt.
But the monetary union's fundamental problems - low potential growth, ongoing recession, loss of competitiveness, and large stocks of private and public debt - have not been resolved.
Moreover, the grand bargain between the eurozone core, the ECB, and the periphery - painful austerity and reforms in exchange for large-scale financial support - is now breaking down, as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands.
Austerity fatigue in the periphery is clearly evident from the success of anti-establishment forces in Italy's recent election; large street demonstrations in Spain, Portugal, and elsewhere; and now the botched bailout of Cypriot banks, which has fueled massive public anger. Throughout the periphery, populist parties of the left and right are gaining ground.
Bailout fatigue
Meanwhile, Germany's insistence on imposing losses on bank creditors in Cyprus is the latest symptom of bailout fatigue in the core.
Other core eurozone members, eager to limit the risks to their taxpayers, have similarly signaled that creditor "bail-ins" are the way of the future.
Outside the eurozone, even the United Kingdom is struggling to restore growth, owing to the damage caused by front-loaded fiscal-consolidation efforts, while anti-austerity sentiment is also mounting in Bulgaria, Romania, and Hungary.
China's problems are many: imbalances between its coastal regions and the interior, and between urban and rural areas; growing income and wealth inequality; and massive environmental degradation.
Farther east, Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence.
"Abenomics" has several components: aggressive monetary stimulus by the Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in 2014 to rein in deficits and debt; a push to increase nominal wages to boost domestic demand; structural reforms to deregulate the economy; and new free-trade agreements - starting with the Trans-Pacific Partnership - to boost trade and productivity.
Daunting challenges
But the challenges are daunting.
It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable; and the structural-reform components of Abenomics are vague.
In this fragile global environment, has America become a beacon of hope? The US is experiencing several positive economic trends: housing is recovering; shale gas and oil will reduce energy costs and boost competitiveness; job creation is improving; rising labor costs in Asia and the advent of robotics and automation are underpinning a manufacturing resurgence; and aggressive quantitative easing is helping both the real economy and financial markets.
But risks remain. Unemployment and household debt remain stubbornly high.
The fiscal drag from rising taxes and spending cuts will hit growth, and the political system is dysfunctional, with partisan polarization impeding compromise on the fiscal deficit, immigration, energy policy, and other key issues that influence potential growth.
Nouriel Roubini is professor of economics at the Stern School of Business, NYU. Copyright: Project Syndicate, 2013. www.project-syndicate.org. Shanghai Daily condensed the article.
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