The World Economy’s Shifting Challenges
George Soros
World economy
– Efforts to revive growth in the world’s most influential economies –
with the exception of the eurozone – are having a beneficial effect
worldwide. All of the looming problems for the global economy are
political in character.
After
25 years of stagnation, Japan is attempting to reinvigorate its economy
by engaging in quantitative easing on an unprecedented scale. It is a
risky experiment: faster growth could drive up interest rates, making
debt-servicing costs unsustainable. But Prime Minister Shinzo Abe would
rather take that risk than condemn Japan to a slow death. And, judging
from the public’s enthusiastic support, so would ordinary Japanese.
By
contrast, the European Union is heading toward the type of long-lasting
stagnation from which Japan is desperate to escape. The stakes are
high: Nation-states can survive a lost decade or more; but the EU, an
incomplete association of nation-states, could easily be destroyed by
it.
The
euro’s design – which was modeled on the Deutsche Mark – has a fatal
flaw. Creating a common central bank without a common treasury means
that government debts are denominated in a currency that no single
member country controls, making them subject to the risk of default. As a
consequence of the crash of 2008, several member countries became over
indebted, and risk premia made the eurozone’s division into creditor and
debtor countries permanent.
This
defect could have been corrected by replacing individual countries’
bonds with Eurobonds. Unfortunately, German Chancellor Angela Merkel,
reflecting the radical change that Germans’ attitudes toward European
integration have undergone, ruled that out. Prior to reunification,
Germany was the main motor of integration; now, weighed down by
reunification’s costs, German taxpayers are determined to avoid becoming
European debtors’ deep pocket.
After
the crash of 2008, Merkel insisted that each country should look after
its own financial institutions and government debts should be paid in
full. Without realizing it, Germany is repeating the tragic error of the
French after World War I. Prime Minister Aristide Briand’s insistence
on reparations led to the rise of Hitler; Angela Merkel’s policies are
giving rise to extremist movements in the rest of Europe.
The
current arrangements governing the euro are here to stay, because
Germany will always do the bare minimum to preserve the common currency –
and because the markets and the European authorities would punish any
other country that challenged these arrangements. Nonetheless, the acute
phase of the financial crisis is now over. The European financial
authorities have tacitly recognized that austerity is counterproductive
and have stopped imposing additional fiscal constraints. This has given
the debtor countries some breathing room, and, even in the absence of
any growth prospects, financial markets have stabilized.
The Political Risks Of The World Economy
Future
crises will be political in origin. Indeed, this is already apparent,
because the EU has become so inward-looking that it cannot adequately
respond to external threats, be they in Syria or Ukraine. But the
outlook is far from hopeless; the revival of a threat from Russia may
reverse the prevailing trend toward European disintegration.
As
a result, the crisis has transformed the EU from the “fantastic object”
that inspired enthusiasm into something radically different. What was
meant to be a voluntary association of equal states that sacrificed part
of their sovereignty for the common good – the embodiment of the
principles of an open society – has now been transformed by the euro
crisis into a relationship between creditor and debtor countries that is
neither voluntary nor equal. Indeed, the euro could destroy the EU
altogether.
In
contrast to Europe, the United States is emerging as the developed
world’s strongest economy. Shale energy has given the US an important
competitive advantage in manufacturing in general and in petrochemicals
in particular. The banking and household sectors have made some progress
in deleveraging. Quantitative easing has boosted asset values. And the
housing market has improved, with construction lowering unemployment.
The fiscal drag exerted by sequestration is also about to expire.
More
surprising, the polarization of American politics shows signs of
reversing. The two-party system worked reasonably well for two
centuries, because both parties had to compete for the middle ground in
general elections. Then the Republican Party was captured by a coalition
of religious and market fundamentalists, later reinforced by
neo-conservatives, that moved it to a far-right extreme. The Democrats
tried to catch up in order to capture the middle ground, and both
parties colluded in gerrymandering Congressional districts. As a
consequence, activist-dominated party primaries took precedence over
general elections.
That
completed the polarization of American politics. Eventually, the
Republican Party’s Tea Party wing overplayed its hand. After the recent
debacle of the government shutdown, what remains of the Republican
establishment has begun fighting back, and this should lead to a revival
of the two-party system.
The
major uncertainty facing the world today is not the euro but the future
direction of China. The growth model responsible for its rapid rise has
run out of steam.
That
model depended on financial repression of the household sector, in
order to drive the growth of exports and investments. As a result, the
household sector has now shrunk to 35% of GDP, and its forced savings
are no longer sufficient to finance the current growth model. This has
led to an exponential rise in the use of various forms of debt
financing.
There
are some eerie resemblances with the financial conditions that
prevailed in the US in the years preceding the crash of 2008. But there
is a significant difference, too. In the US, financial markets tend to
dominate politics; in China, the state owns the banks and the bulk of
the economy, and the Communist Party controls the state-owned
enterprises.
Aware
of the dangers, the People’s Bank of China took steps starting in 2012
to curb the growth of debt; but when the slowdown started to cause real
distress in the economy, the Party asserted its supremacy. In July 2013,
the leadership ordered the steel industry to restart the furnaces and
the PBOC to ease credit. The economy turned around on a dime. In
November, the Third Plenum of the 18th Central Committee announced
far-reaching reforms. These developments are largely responsible for the
recent improvement in the global outlook.
The
Chinese leadership was right to give precedence to economic growth over
structural reforms, because structural reforms, when combined with
fiscal austerity, push economies into a deflationary tailspin. But there
is an unresolved self-contradiction in China’s current policies:
restarting the furnaces also reignites exponential debt growth, which
cannot be sustained for much longer than a couple of years.
How
and when this contradiction will be resolved will have profound
consequences for China and the world. A successful transition in China
will most likely entail political as well as economic reforms, while
failure would undermine still-widespread trust in the country’s
political leadership, resulting in repression at home and military
confrontation abroad.
The
other great unresolved problem is the absence of proper global
governance. The lack of agreement among the United Nations Security
Council’s five permanent members is exacerbating humanitarian
catastrophes in countries like Syria – not to mention allowing global
warming to proceed largely unhindered. But, in contrast to the Chinese
conundrum, which will come to a head in the next few years, the absence
of global governance may continue indefinitely.
No comments:
Post a Comment