On the eve of the US Presidential elections, Prof. Bertrand Candelon shares some insights on the challenges faced by the US and Europe in the new world order.
From the G7 to the G20
Today the US no longer bears the sole responsibility to cure the economic and financial crisis. We are living in a new world order where the bosses are no longer the G7 countries but the new economies of the G20, such as China, Brazil and the oil producers. In this changed context, the outcome of the US elections is less important for Europe than they were 30 or 40 years ago.
Barack Obama or Mitt Romney?
Generally speaking, Barack Obama tends to favour regulations in the financial market and in the banking system. As a liberal, Mitt Romney is clearly against any regulations.
Europe has a better chance to engage in this type of dialogue with Obama than with Romney. But it will be a difficult dialogue, even with Obama, because the political debate in the US is taking place much more to the right than in Europe. That’s what we have observed in the last two or three years.
The BRIC countries, in particular China and Brazil, have very competitive economies and are growing much faster than the rest of the world. They are attracting capital and accumulating reserves at the expense of other countries. The BRIC countries are China, Brazil, India, Russia with Turkey and South Africa possibly joining them soon.
The BRIC countries should keep in mind, however, that the new world order not only comes with advantages but also duties.
The automatic stabilizing factor would be for the BRIC countries to have more expensive currencies and to accumulate lesser reserves. As a result, the euro would be cheaper and the market could equilibrate.
The US and the BRIC countries don’t benefit from a situation of economic instability in Europe. China is already feeling the effects of the crisis: the growth rate in China has gone down from an average of 10 percent to 7,6 percent. The Chinese Central bank has introduced a stimulation pact in China to support internal growth. In the US, Ben Bernanke is doing a good job by taking quantitative easing measures (printing money to sustain the economic growth.)
Fiscal policy should be counter cyclical
Basic macroeconomic principles tell us that the first objective of fiscal policy is to be counter-cyclical: governments should spend when the economy is struggling and save when it is thriving. In Europe, the Netherlands and France are amplifying the crisis by doing the opposite.
An increase in the level of debt of a country indicates that it is financing future growth. Reducing the debt means less future growth and more debt in the long run. That’s what we are observing in Greece.
Perhaps fiscal policy should not be done by politicians. In Chili, fiscal policy is managed by a group of independent experts. In Europe, this could be a role for the European Commission.
Did the Netherlands really have to adopt austerity measures?
Two years ago, the Dutch economy was one of the big economic models, known as the polder model. Then the Dutch government decided to go “more Greek than the Greek” and embarked on a very strict austerity plan, with very bad consequences for its economy, as we can see now.
I don’t understand why the Dutch authorities adopted measures that have ultimately led to increased unemployment, increasing debt and decreasing GDP. Was the decision related to cultural factors, such as Calvinism?
Different economic situations call for different monetary policies
There is a huge amount of heterogeneity in Europe: Germany is doing quite well, whereas southern European countries are doing poorly.
These different situations cannot be accommodated by one single monetary policy. The policy that best applies for Germany will not be the optimal one for Greece.
This discrepancy leads to terrible macroeconomic results: Greece has seen its GDP decrease by 25 percent since 2008. The country is on the brink of bankruptcy.
Today, even IMF’s Christine Lagarde and the World Bank are saying that the European austerity plan is too abrupt.
How to stop the crisis mutation
The banking crisis in the US has led to a sovereignty crisis in Europe which has in turne evolved into a currency crisis. Now Europe is now moving toward a political crisis with more extremist governments being elected in various countries.
This mutation can only be stopped by reinforcing budgetary control and transfer between countries, by re-motivating people.
What is at stake for the EU?
The world is not in equilibrium and global imbalances don’t work in the long run.
Europe is facing two possible scenarios:
– Either it manages to reinforce EU federalism, go towards a fiscal and social Europe and become stronger – but we are very far from this.
– Or, if the first scenario does not succeed, the European project will fail.
The Arab Spring of 2011 started because people could not afford to buy bread. So did the French Revolution in 1789. We are currently facing a preoccupying social situation in Greece, Spain and Portugal.
What can we do?
We need to go back to the main principles of macroeconomics and listen to the opinions of respected economists such as Nobel Prize winners Paul Krugman and Joseph Stiglitz and experts such as Philippe Aghion and Paul de Grauwe, instead of financial experts and politicians.
What ultimately matters is the long run sustainability.
Bertrand Candelon, French, is a professor, holding the chair in International Monetary Economics at the University of Maastricht. Previously he received a PhD from Universite Catholique de Louvain, and was Pierre and Marie Curie postdoctoral fellow at the Humboldt Universität zu Berlin. He has written numerous works in the area of macroeconomics (Money demand, fiscal policy) and international finance (financial crisis early warning systems, the financial markets co-movements). He is a consultant at the institute of the International Monetary Fund, African division, the European Commission and is one of the founders of the Methods in International Finance Network.