Saturday June 30, 2012
Los Cabos Growth and Jobs Action Plan
WHAT ARE WE TO DO
By TAN SRI LIN SEE-YAN
JUST returned from the Shadow G20 meeting of the International Policy Advisory Group convened by the Asian Development Bank (led by president H. Kuroda) and the Earth Institute of Columbia University (under the direction of its president, Prof Jeffrey Sachs). Its theme: The global economy in uncertain waters question marks over fiscal sustainability, financial stability, structural adjustment, and global environmental adjustment.
The gathering of about 30 global scholars (including Daniel Cohen, advisor to French President Francois Hollande) deliberated for two days with the view of being better placed to influence the outcome on key global issues confronting G20 leaders at its June 18-19 meeting in Mexico. As they met, they were no better off than where they left off last November in Cannes, France, facing heightened risks from Europe that threatens to cripple the global economy.
As it turned out, this time the stakes were even higher as growth in both the rich and emerging nations was now slackening in sync.
Not surprisingly, the G20 meeting turned out to be a non-event with a declaration that is full of “sound and fury, signifying nothing.” The G20, accounting for two-thirds of the world's population and 85% of global output, was expected to press for swift and decisive action by Europe to resolve the turmoil. This time, some leaders did push to steer the agenda's focus away from fiscal austerity towards more definite steps to spur growth, so critical to global recovery. Said an Organisation for Economic Co-operation and Development (OECD) senior official: “The fire is in Europe right now and it is affecting the system as a whole. It is no longer just an European issue.” Realistically, G20 leaders can only hope that their discussions will be taken further at key gatherings of European leaders as they work towards the EU Summit. But time is not on their side. Contagion lurks.
Los Cabos GJAP
As in Cannes, G20 was not expected to do more than urge the eurozone urgently to resolve the crisis. The communique made no real new commitments, only a renewed (and reworded) commitment to ensure the crisis does not spiral out of control: “We are committed to adopting all necessary policy measures to strengthen demand, support global growth and restore confidence enhance jobs creation as reflected in the Los Cabos Growth and Jobs Action Plan (GJAP). We will implement all our commitments in a timely manner and rigorously monitor their implementation.” Unfortunately, they are short on real actions to be taken. This plan, however, did envisage policy actions to be focused on the following:
Addressing the sovereign debt and banking crisis in the euro area;
Ensuring financial stability;
Boosting demand and growth, and reducing high unemployment;
Ensuring the pace of fiscal consolidation supports economic recovery;
Dealing with geopolitical risks which can lead to a spike in oil prices;
Ensuring emerging markets maintain sustainable economic growth; and
Resisting protectionism and keeping markets open.
To promote confidence, G20 agreed on the following:
1. Eurozone members of G20 (EAM-G20) will take all necessary measures to safeguard the integrity and stability of the area, and support growth, ensure financial stability and promote fiscal responsibility.
EAM-G20 will move to get a more integrated financial architecture, covering banking supervision and recapitalisation, and deposit insurance.
Foster adjustment through reforms to strengthen competitiveness in deficit countries, and to promote demand in surplus nations.
EAM-G20 will support growth, including making better use of European financial means, such as the European Investment Bank (EIB), project bonds, and structural funds for more targeted investment.
2. Fiscal policies in G20 will be consistent with real economic recovery.
3. Monetary policies will focus on economic growth with price stability.
4. Should conditions significantly deteriorate, G20 nations stand ready to coordinate and implement new measures to support demand.
5. Emerging markets' policies to support demand with price stability.
6. G20 will further rebalance global demand, by pushing demand in surplus nations, rotating demand to the private sector in countries with fiscal deficits, and raising savings in deficit countries.
7. G20 reaffirms its shared interest in a strong and stable international monetary system and support for market-determined exchange rates.
But what real mechanisms are being devised and used to really boost confidence?
IMF's resources were raised at G20 by new BRICS pledges US$43bil from China and US$10bil each from India, Russia and Brazil; US$10bil from Mexico, US$5bil from Turkey and US$1bil from a number of smaller nations, raising total new commitments to US$456bil. The new cash boost would nearly double IMF's real lending ability to around US$700bil. These resources are being made available for crisis prevention and resolution by meeting potential financing needs of all IMF members; and not earmarked for European use. There was expressed concern about signing off on new loans to IMF for use to backstop the eurozone. Emphasised the Canadian finance minister: “The situation is not that we're dealing with impoverished countries here. The reality is that we have non-European G20 nations that have a lot of hesitation in dedicating resources to the wealthy European countries.” The new pledges were made on the understanding that IMF would move promptly forward on governance reform to enhance the say of developing and emerging nations.
BRICS advanced the idea of pooling foreign exchange reserves through multilateral currency swap arrangements in the face of new threats that the evolving European crisis would spill over into the global economy. Swaps allowing central banks to lend each other currencies on demand to help boost liquidity and keep markets well funded represent emergency measures at a time of crisis. They are also viewed as part of a broader move away from over-reliance on US dollar and euro, towards the IMF. Similar arrangements are already in place under the Chiang Mai Initiative among Asean plus China, Japan and South Korea, which last month agreed to double its size to US$240bil. Also, Russia is setting aside US$40bil to stimulate in the event the eurozone crisis escalates and spreads, to support “socially needy people” and “systemically vital enterprises.”
G20 leaders have fundamental disagreements on most key economic issues: high taxes or low; larger central bank bond portfolios or smaller; more government or less; more growth or less austerity. The Los Cabos GJAP was high at expressing fine sentiments but lacked details on actual mechanisms for real action. Like it or not, Europeans face a huge dilemma over Greece. Its new coalition wants to extend by “at least two years” to 2016 the budget deficit targets Athens must achieve; it's also proposing tax cuts and other measures over the next four years to support the unemployed and low-income groups hit hard by five years of recession, including: freeze on the 150,000 public sector job cuts, pay two years of unemployment benefits instead of one, revise the 22% cut in minimum wage, give income tax relief to the low income brackets and reduce sales tax on restaurants and agriculture.
Realistically, the troika (EU, ECB and IMF) can be expected to offer some adjustments, but no radical rewrite of bailout terms; Germany will continue to resist. Greece GDP will contract by more than 6% this year with no turnaround signs. Jobless rate is at a record high, especially among youth. Greece is now on a collision course with international creditors. It can't force “internal devaluation” through falling wages nor create enough growth to allow existing debt to be serviced. Prospects remain dismal. Ironically, Greece is no longer at the centre of the crisis. The fate of the euro will be decided in Spain and certainly, in Italy.
On paper, G20 is now committed to push for more growth. The ongoing crisis serves as a new test of G20's power to co-ordinate global action. In the 2008-2009 crisis, its quick and co-ordinated global moves at stimulation helped reverse the global disaster. Now, there is little ammunition left to fight a potential new slump. Europe and the United States are struggling with crushing debts and political stalemate. Emerging nations' growth is slackening in part because of growing uncertainty risks, and in part because of troubles in Europe and the United States. Be that as it may, France is committed to push for euro-wide growth, and wants the EU to agree before end-2012 on growth boosting measures worth 120 billion euros; and appears prepared to trade-off with Germany in soft pedalling its call to issue mutualised debt in the euro-bloc.
This growth compact will comprise a combination of 55 bil euros in unused EU structural funds, 4.5 billion euros in project bonds to be deployed in areas such as new technologies, renewal energy, transport and other infrastructure; 60 billion euros in new resources to be raised by leveraging a 10 billion euro increase in EIB's capital. The idea is then to enlarge this by end-2012 to raise more new funds to create jobs for youth. This compact is pathetically inadequate. It looks like a face-saving devise for Hollande, admits Cohen, his advisor. Nobel laureate Paul Krugman refers to this as part of the “great abdication.”
What, then, are we to do?
The impact of good news gets more brief each time. Of late, good news gets a half-life in 24-hour live markets. Spain's bank bailout rallied markets and investors sentiment for only half a day on June 11. The following weekend of the Greek election with an outcome as good as could have been hoped did not buoy the markets for half a morning. It fizzled out because the election changed nothing. Such has been the influence of European decisions doing the minimum to address each crisis as it comes along, so that expectations are now so low that they hardly disappoint markets. As it happens, the downturn in eurozone's private sector is becoming more entrenched, with falling new orders and rising jobless levels denting confidence. June is the fifth consecutive month activity across the entire eurozone declined, dragging down heavyweights Germany and France, and increasing calls for ECB action support. The eurozone's north-south divide is likely to worsen. Consumer spending will support growth in Germany and France, while austerity programmes will contribute to contractions in Spain, Italy and Greece. This doesn't look good.
Growing discontent reflects the need to do more, and more radically: we know fiscal austerity needs to be relaxed; a credible growth compact is needed to complement the fiscal compact; and EU badly needs a fiscal union with debt mutualisation (euro-bonds i.e. collective eurozone borrowing). In addition, the time has now come to implement a banking union (integrated eurozone bank governance system), starting with euro-wide deposit insurance and bank re-capitalisation schemes.
And, the EU needs to move towards greater political integration, with or without Greece. There is nothing new here that's not in GJAP. But Germany is known to actively resist its key elements. How did Greece, the birthplace of democracy, come to have a parliament full of hammers, sickles and swastikas? Yet, more than 50% of Greeks voted for stronger European unification. In his latest column, Krugman reminds us once again of the lessons from 1931 (when bank panic in Austria was allowed to spread globally) and from 1937 (when US shifted far too soon from fiscal stimulus to austerity, plunging the recovering economy into a second-dip recession), which if not well learnt, will land the world once again in catastrophe, simply because it is politically expedient to adopt the line that “avoiding economic disaster is somebody else's responsibility.” What a shame. True, it's more about politics than economics. Electoral politics can readily spoil the best efforts to salvage the euro. Just too many things can go wrong.
● Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who speaks, writes and consults on economic and financial issues. Feedback is most welcome; email: firstname.lastname@example.org.