Wednesday, February 22, 2012
‘Politics beyond borders’ will become a global necessity, writes Kemal Dervis
IT is now clear that the eurozone crisis will continue well into 2012, despite the slight recovery in stock markets.
Negotiations between Greece and the banks over Greek sovereign debt may have been concluded, but sufficiently wide participation by banks in the deal remains in doubt.
Meanwhile, the fact that the ECB had to take at hit on Greek debt, the possibility of which was first raised by the International Monetary Fund, sends the message that a "haircut" for private bondholders will not be enough to return Greece to financial sustainability.
The IMF’s concerns are valid, but the fund’s idea is being resisted fiercely, owing to fears of political contagion: other debt-distressed eurozone countries might press for equal treatment. Moreover, the promised increase in IMF resources that would allow it to build a stronger firewall against financial contagion has still not arrived. And all of the changes agreed upon for the European Stabilisation Fund and the European Stability Mechanism have yet to be implemented.
Some positive steps have been taken. The ECB’s generous provision of liquidity to European banks at only 1% interest for up to three years has prevented a banking crisis from piling on top of the sovereign-debt crisis.
But that initiative has not succeeded in reducing the "problem" countries’ longer-term borrowing costs to levels compatible with their projected growth rates: there is just too much long-term uncertainty, and growth prospects are too discouraging. Indeed, in mid-January, Standard & Poor’s downgraded AAA-rated France and Austria, in addition to seven other eurozone countries — Slovenia, Slovakia, Spain, Malta, Italy, Cyprus, and Portugal.
It now seems clear that one key challenge facing the eurozone stems from the fact that it is a monetary union without being an economic union. As a result, divergences in production costs over time cannot be compensated by exchange-rate adjustments.
In the absence of somewhat higher inflation in the surplus countries, say, 4% a year, adjustment requires deflation in the crisis countries to bring about a noticeable relative decline in production costs over time. In practice, such deflation can be achieved only at the cost of high unemployment and social distress. It is therefore unclear whether the current strategy of combining austerity and deflation is politically feasible, which explains the uncertainty hanging over the eurozone.
Somewhat higher inflation in the surplus countries and larger cross-border resource transfers would give the deficit countries more time, allowing for structural reforms to produce results and reducing the need for deflation. But northern European surplus countries reject such an approach, fearing that it would weaken the pressure on southern European debtor countries to undertake structural reforms in the first place.
There is also a global dimension to Europe’s challenges — the tension between national democratic politics and globalisation.
Trade, communication, and financial linkages have created a degree of interdependence among national economies, which, together with heightened vulnerability to financial-market swings, has restricted national policymakers’ freedom of action everywhere.
Perhaps the most dramatic sign of this came when Greece’s then-prime minister, George Papandreou, announced a referendum on the policy package proposed to allow Greece to stay in the euro. While one can debate the merits of referenda, the heart of the problem was the very notion of holding a national debate for several weeks, given that markets move in hours or minutes. It took less than 24 hours for Papandreou’s proposal to collapse under the pressure of financial markets (and European leaders’ fear of them).
Around the world, the stock of financial assets has become so large, relative to national income flows, that financial-market movements can overwhelm most countries. Even the largest economies are vulnerable, particularly if they are highly dependent on debt finance.
If, for some reason, financial markets and/or China’s central bank were suddenly to reject US Treasury bonds, interest rates would soar, sending the US economy into recession. But if Americans’ appetite for Chinese exports collapsed because of a financial panic, China would find itself in serious economic trouble.
These interlinked threats are real, and they require much stronger global economic policy cooperation. Citizens, however, want to understand what is going on, debate policies, and give consent to the types of cooperation proposed. Thus, a more supra-national form of politics is needed to re-embed markets in democratic processes.
Unless globalisation can be slowed down or partly reversed, which is unlikely and undesirable in the long run, the kind of "politics beyond borders" for which Europe is groping will become a global necessity.
Indeed, the European crisis may be providing a mere foretaste of what will likely be the central political debate of the first half of the 21st century: how to resolve the tension between global markets and national politics.
nKemal Dervis, a former minister of economics in Turkey, is vice president and director of the global economy and development programme at the Brookings Institution.
Copyright: Project Syndicate, 2012.
www.project-syndicate.org
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