January 16, 2012 7:09 pm

America, Greece and a world on fire

It took an economic crisis in Greece in 1947 to force the US to assume world leadership. Now, more than 60 years later, another Greek crisis is showing what the world feels like without US leadership.

In February 1947 the British government bankrupted by the war and beset by a harsh winter – told America that it could no longer afford to aid Greece, which was on the brink of economic collapse and civil war. A British diplomatic cable at the time recorded a belief in Washington that “no time must be lost in plucking the torch of world leadership from our hands”.


President Truman went before Congress and requested $400m in aid for Greece, pledging that America would nowsupport free peoples who are resisting attempted subjugation”. A few weeks later, the US announced the Marshall Plan – a huge programme of financial aid, aimed at stabilising the whole of western Europe.

The contrast between then and now is stark. Once again, an economic crisis that began in Greece is threatening Europe. But this time there is no question of America assuming the central role in the management of the crisis.

Of course, the two eras are not the same. Europe is no longer on the point of destitution, as it was in 1947. Nor is there a “communist threat” to focus minds in Congress.

Nonetheless, in 2012 as in 1947, there is a clear American and global interest at stake in Greece. Announcing his plan, George C. Marshall, the secretary of state, argued that America’s own economic health was threatened by chaos in Europe and that the US would do all it could to aid “the return of normal economic health to the world”.

This is a principle that America has applied consistently ever since. The group of US officials who designed the policies to rescue the global economy from the Asian and Russian financial crises in the late 1990s were popularly labelled “the committee to save the world”. It was a pretentious title. But the underlying point was valid. The world needed leadership from Washington – and got it.

So what has changed? A lack of money is a large part of the problem. America spent the equivalent of 5 per cent of its gross domestic product on the Marshall Plan. That is not feasible now. Tim Geithner, the US Treasury secretary, frequently urges his European colleagues to do much more to solve the debt crisis. But, while he can speak softly, he is not carrying a big cheque book.

However, American leadership has not always relied on cash. The “committee to save the world” did not spend a huge amount of money.

But it was operating in a different period. Less than a decade after the collapse of the Soviet Union – and with the American economy booming US policymakers had the credibility and the confidence to lead. In large part, that is lacking today. The financial crisis has taken its toll on America’s ability to persuade, as well as on its finances.

The Obama administration has also taken a conscious decision to focus resources on Asia. The US has decided that the key economic and geopolitical questions of the coming century will be played out across the Pacific Ocean. So Europe and the Middle East will get less American time, money and attention.

The consequences of this shift in emphasis have already been seen in the past year. When Nato intervened militarily in Libya last year, the US took a supporting role albeit a vital one. And while officials from the EU have camped out in Athens this year, senior Americans have taken a more hands-off approach. Hillary Clinton, the US secretary of state, travels relentlessly. But she visited Greece just once last year, en route to India.

The strategic choice made by the Americans is logical enough. Asia is the most dynamic economic region in the world – and China is the emerging superpower. In theory, it makes sense to shift focus from Europe to Asia.

The trouble is that while the geopolitical and economic challenges presented by the Greek crisis of 2012 are not as dramatic as those of 1947, they are still very serious. If Greece defaults, there is a high risk of a major financial crisis in Europe that spreads across the world.

There are also big strategic issues playing out in the eastern Mediterranean. Across the water from Greece, the whole of north Africa is in ferment. Tensions are rising between Turkey, Cyprus and Israel. Chaos in Greece is already loosening the country’s ties to the EU. China has taken out a long lease on the port in Piraeus and Russian oligarchs may swoop as Greek companies are privatised.

America’s dearest hope is that the management of the euro crisis can be subcontracted to Germany. Then, if Europe gets on top of its debt crisis, the EU can also do more to manage global problems.

The trouble is that the Europeans – and the Germans in particularkeep disappointing. For its own domestic reasons, the German government has been unwilling and unable to provide the overwhelming financial resources that Washington keeps urging Berlin to deploy. The Germans have also proved to be disappointing partners in other global crises.

One frustrated Pentagon official exclaimed recently: “I told a German colleague: ‘The world is on fire, where are you going to help?’ And he just shrugged.”

In 1947, when a conflagration in Greece was threatening the world, the fire trucks set off from Washington. In 2012 they are being sent from Berlin and Brusselslate and under-equipped. As a result, the fire rages on.

Copyright The Financial Times Limited 2012.


Noda Says Japan Must Heed Lessons From Europe’s Credit-Rating Downgrades

Prime Minister Yoshihiko Noda said containing Japan’s public debt load, the world’s largest, is critical after Standard & Poor’s downgraded credit ratings on France, Austria and seven other European nations.

Europe’s fiscal situationisn’t a house burning on the other side of the river,” Noda said on TV Tokyo Holdings Corp.’s program on Jan. 14. “We must have a great sense of crisis.”

Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda’s administration hadn’t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation’s sovereign grade.

Japan’s government, which has enjoyed borrowing costs that are around 1 percent, wouldn’t be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.

“The proposed increase in the consumption tax to 10% would not be enough to put the public finances on a sustainable track,” David Rea, a Japan economist at Capital Economics Ltd. in London, wrote in a report last week. “A larger increase is needed, and soon, but is highly unlikely without a specific mandate from the electorate as support from the opposition and even some elements of the ruling party is non-existent.”

Monitoring Yields

The finance ministry is closely monitoring Japanese bond yields, Finance Minister Jun Azumi said on a Fuji Television Network Inc. program yesterday. He reiterated Noda’s statement that Japan should view Europe’s debt crisis as an issue it might face in the long term without fiscal reform.

France’s loss of its AAA rating probably won’t have any immediate effect in Japan as domestic banks’ holdings of French bonds aren’t large, Azumi said in Tokyo yesterday, according to KyodoNews.

About 57 percent of the public opposes raising the sales tax, and the approval rating for Noda’s cabinet fell to 29 percent from 31 percent last month, the Asahi newspaper said yesterday, citing its own survey. The Nikkei newspaper said Noda’s public approval rose 1 percentage point to 37 percent after a cabinet reshuffle last week, while the Yomiuri newspaper reported a decline in public approval to 37 percent from 42 percent.

‘Worse and Worse’

Japan’s finances are “getting worse and worse every day, every second,” Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview on Nov. 24. Asked if this means he’s closer to lowering Japan’s credit rating, he said it “may be right in saying that we’re closer to a downgrade.”

S&P rates Japan AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a “comprehensive approach” to containing its debt burden, which the government has projected will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March’s record earthquake.

Aging Population


Japan’s aging population is also weighing on Noda’s struggle to achieve fiscal health. Social-security expenses have more than doubled in two decades and will account for 52 percent of general spending for the year starting in April, according to a budget proposal the cabinet approved last month.

France and Austria lost their top credit ratings last week in a string of downgrades that left Germany with the euro area’s only stable AAA grade, as S&P warned that crisis-fighting efforts are still falling short.

France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, the rating company said in Frankfurt. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative outlook. Spain and Italy were also among the nine nations downgraded.

On Jan. 12, Italy auctioned 12 billion euros in treasury bills as borrowing costs plunged in the country’s first debt sale of the year. The result may help ease investor concern about Italy’s ability to finance Europe’s second-biggest debt, which pushed the yield on the country’s benchmark 10-year bond above the 7 percent level that led Greece, Ireland and Portugal to seek bailouts.

The International Monetary Fund has said a gradual increase of Japan’s sales tax to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.”

No one is saying we don’t need sales-tax hikes in the future,” Deputy Prime Minister Katsuya Okada said during a program by public broadcaster NHK yesterday. “If you’re a politician, you know the fiscal situation.”

January 17, 2012 7:38 pm

Why the super-Marios need help

Ingram Pinn illustration

Will the two MariosMario Monti, the new technocratic prime minister of Italy, and Mario Draghi, the still quite new president of the European Central Banksave the eurozone? No. But individuals can make a difference. These men bring sophisticated pragmatism to the table. Without that, this flawed structure will not survive. Policymakers must be both more co-operative and more flexible.

The economic and political costs of a breakdown would be so large that one has to hope for better. Maybe the two Marios will shift policy in a more productive direction.

Two straws float in the wind.

Click to enlarge

The first is the new long-term refinancing operation, announced by the ECB last month. With banks under fierce funding pressures, the offer of three-year money at the average of the ECB’s benchmark rate (today 1 per cent), without stigma, was one the eurozone’s banks could not refuse. Initial take-up was €489bn for 523 banks. The balance sheet of the ECB is about to explode. This was a bold and cunning move by Mr Draghi and probably the most he could get away with right now.

Cheap longer-term central-bank funding should help stabilise the eurozone financial system. Whether it will also stabilise sovereign debt markets is far less clear. Most European banks are likely to resist purchasing the debt of riskier sovereigns, given the pressure from the European Banking Authority to raise the capital they hold. But the domestic banks might make different decisions, probably under pressure. That would help fund vulnerable governments, but also increase the concentration of risk in domestic banks. This is high: in mid-2011, 28 per cent of Spanish debt and 27 per cent of Italian debt was held by domestic banks, according to a paper by Jean Pisani-Ferry for Bruegel, a Brussels-based think-tank.*

A second straw is the willingness of Mario Monti to argue, in an interview with the Financial Times, for creditor countries to do more to lower his country’s borrowing costs, even warning there would be a “powerful backlash” among voters in the periphery if they did not. Mr Monti is in a strong position to make this argument. If not him, who? If not now, when? He is a well-respected official with staunchly pro-European views and a strong sympathy for German attitudes to competition and fiscal and monetary stability. Upon his success is likely to depend the survival of the euro, at least in its current form. His failure would surely bring the deluge.

Messrs Draghi and Monti are addressing two interlinked fragilities: the vulnerability of the banking system and the unsustainable terms on which weaker countries can now borrow (see chart). But they cannot resolve these difficulties. For that more radicalism is required than either can deliver, on his own.

The paper by Mr Pisani-Ferry and another one co-authored by Paul de Grauwe of the university of Leuven indicate the deeper problems to be addressed.** The former argues that the debate on reform focuses on fiscal discipline even though failure to abide by these fiscal rules played a small part in causing today’s crisis. The irresponsible behaviour of private lenders and, in many cases, private borrowers was as important. What needs to be understood, both papers suggest, is the fragility of the eurozone as a structure, in three interlinked respects: the lack of any joint responsibility for public debt; the absence of monetary support for sovereign borrowing, even in a severe crisis; and the close connection between sovereigns and domestic banks (see chart).

What is striking about risk spreads on eurozone sovereign debt is that they are not matched by those on the sovereign debt of high-income countries with their own central banks, such as the UK, even though their deficits or debts are sometimes higher than those of comparable eurozone members. That is why France is understandably irritated by its rating downgrade, while the UK remains (for the moment) at triple A. Investors in what have becomesub-sovereigndebts face a liquidity risk, which might bite them at any time.

Such enhanced vulnerability to financial and sovereign debt crises is not the only threat to the weaker members of the eurozone. They also confront a bigger adjustment task than do countries with flexible exchange rates. The danger, however, is that the severity of the financial crises members suffer deprives them of the time they need to secure changes in competitiveness.

In Italy’s case, for example, the combination of high interest rates and vulnerable banks with fiscal austerity is likely to lead to a lengthy and deep recession and so to a rise in cyclical fiscal deficits as the structural deficit falls. For a big country to deflate its way to health, in these circumstances, is a labour of Sisyphus. No modern democracy has infinite patience. Markets know this and will react accordingly.

Mr Pisani-Ferry argues that several possible reforms do exist: a move to genuine federal oversight and backstop for banks; reform of the ECB, to make it a modern central bank; or something closer to fiscal federalism. All of these create huge difficulties.

None of these is likely to be agreed. But it is hard to see any escape from the crisis and move to something more stable without some such changes. If the status quo fails and break-up is ruled out, one must choose reforms, however painful.

If we ask why the needed changes are quite so difficult, the answers are probably threefold. First, this project was a bet on howEuropeancitizens of member states would feel. The answer, so far, is “not enough” and perhaps even “less and less”. Second, the project was a bet on the ability to agree on a shared diagnosis and workable solutions in a crisis.

These have been lacking, so far. Finally, the project was also a bet that, come the crisis, leadership would be forthcoming. Again, we are still waiting for the necessary vision.

Yet the costs of failure are so large that the possibility of domestic and eurozone reform must be kept alive. Mr Draghi’s leadership of the ECB can help do that. Meanwhile, Mr Monti is in a position to cajole other members, including the Germans, towards reforms. He can speak truth to the power of the creditors. The latter should listen attentively.

* The Euro Crisis and the New Impossible Trinity, January 2012, www.bruegel.org

** “Mispricing of Sovereign Risk and Multiple Equilibria in the eurozone”, January 2012

Copyright The Financial Times Limited 2012.


Stiglitz says European austerity plans are a 'suicide pact'

European governments have signed a "suicide pact" by imposing fiscal austerity plans that will collapse their economies, Joseph Stiglitz, the liberal economist, has warned.
Stiglitz says European austerity plans are a 'suicide pact'
Joseph Stiglitz likened harsh austerity measures to medieval 'blood-letting' that left the patient sicker than before. Photo: Justin Thomas
Imposing austerity measures as countries slow towards recession is a fundamentally flawed response, said Mr Stiglitz, who won the Nobel prize in 2001 for his work on how markets work inefficiently.

"The answer, even though they see over and over again that austerity leads to collapse of the economy, the answer over and over [from politicians] is more austerity," said Mr Stiglitz to the Asian Financial Forum, a gathering of over 2,000 finance professionals, businessmen and government officials in Hong Kong.

"It reminds me of medieval medicine," he said. "It is like blood-letting, where you took blood out of a patient because the theory was that there were bad humours.

"And very often, when you took the blood out, the patient got sicker. The response then was more blood-letting until the patient very nearly died. What is happening in Europe is a mutual suicide pact," he said.

Keynesian economics, which require governments to help sustain demand, suggests that austerity measures should be imposed when an economy is booming, not waning.

Mr Stiglitz pointed out that 700,000 public sector jobs had been cut in the United States in the past four years, removing demand from the system as unemployment spikes. The UK is set to lose a similar number by 2017.

Instead, Mr Stiglitz argued the best economic medicine is infrastructure spending, especially on transport and energy projects. He pointed to China as one country that had successfully combatted financial crises with stimulus packages.

On Monday, George Osborne had told the same forum that the UK's fiscal austerity measures, which have been in place for a year and under which the economy has begun to tip into recession, were the only way to convince the market of the UK's economic credibility.

"When you have a high budget deficit, if you do not have a [disciplined fiscal] plan then you will not have sustainable growth because investors will be worried about investing in your country," the Chancellor said.

However Mr Stiglitz argued that austerity in the UK and elsewhere would not boost confidence. "There will not be a restoration of confidence as long as economies keep falling, and that will continue until [politicians] change economic course. And I do not think that is likely," he said.

Mr Stiglitz said economists are now not debating if the Euro will break up, but how and when it will happen.

"Among economists the discussion is about the best way to end the euro. It could be civilian upset that does it. Youth unemployment in Spain has been over 40pc since 2008. How much longer will they tolerate that? The policies of the new government are for more of the same medicine, except worse.

"The other way it may end is when the European Central Bank refuses to be the lender of last resort for some countries, precipitating a crisis. We can be sure that markets will be highly volatile and the end of the Euro will be a very severe disruption to the global economy," he said.

However, he compared the strictures of the single currency to the gold standard, and noted that countries which had abandoned the gold standard early had recovered more quickly.

"When the Euro was founded, most economists were skeptical," he said, noting that the single currency was a political project that had not satisfied the optimum conditions for a currency bloc. "They hoped they would be able to finish the project over time, but the politics was not strong enough," he said.

Mr Stiglitz also said that while he was critical of the ratings agencies, a decision to downgrade the European Financial Stability Fund (EFSF) on Monday was reasonable. "The EFSF was trying to leverage something out of nothing, and that was never going to work, and they were just saying that it wasn't going to work," he said.

January 18, 2012 2:00 am

World Bank warns emerging nations

World BankAFP

Developing countries should take steps to plan for a global economic meltdown on a par with 2008-09 if the European sovereign debt crisis escalates, the World Bank warned on Wednesday in its latest economic forecasts.

Predicting significantly slower global growth in 2012 than it expected last summer even if the eurozone muddles through its crisis, World Bank economists said that if financial markets deny funds to eurozone economies, global growth would be about 4 percentage points lower than even these figures, with poorer economies far from immune.

Andrew Burns, head of macroeconomics at the Bank, told journalists in London: “Developing countries should hope for the best and prepare for the worst.”

Stressing the importance of contingency planning, he added: “An escalation of the crisis would spare no one. Developed and developing-country growth rates could fall by as much or more than in 2008-09.”

The world economy would find it much more difficult to grow out of a new economic crisis, the World Bank warned, because rich countries had little monetary or fiscal ammunition available to stem any vicious circle and poorer countries now havemuch less abundant capital, less vibrant trade opportunities and weaker financial support for both private and public activity [than in 2009]”.

The World Bank declined to predict how likely such a scenario was and added that there was little that developing countries could do to prevent a severe crisis, but urged them to evaluate their vulnerability to a euro-led crisis.

Even without a descent into a fresh crisis, the World Bank’s economic forecasts are significantly lower than those in June 2011, reflecting downside risks seen last summer which have already materialised. Using market exchange rates, the global economy is likely to grow by 2.5 per cent in 2012 and 3.1 per cent in 2013 compared with forecasts of 3.6 per cent for both years forecast only six months ago.

It expects the eurozone economy to contract in 2012 and other advanced economies to grow by only 2.1 per cent. The downgrade reflects heightened uncertainties over advanced economies which might in turn reduce the growth of world trade and demand from poorer economies.

“The motor of the global economydeveloping nations – is slower at the same time as the world’s largest economic area – the EU – is in recession and these could feed on each other,” Mr Burns said.

If such a vicious circle were to develop, developing countries would find it impossible to decouple from European woes, he added. Many would be affected by falling oil and commodity prices, remittances sent home from workers in rich countries could fall more than 5 per cent along with income in rich countries, banking systems in poor countries would be vulnerable to financing risk as many developing countries have significant short-term debt falling due in 2012 and a confidence crisis would also hit spending in rich and poor countries alike.

China was the only large economy that had the capacity and will to implement policies to counter a new global downturn, Mr Burns said, but even the world’s second-largest economy’s power to counter recessionary forces would be weaker than in 2008 because the bank lending stimulus created an overheated housing sector while other methods of stimulating growth would be slower and less effective in stimulating demand.

Copyright The Financial Times Limited 2012.