Category Archives: Euro Zone

2013 May Not See a Recovery

euro parliament interior

Published in the Telegraph-Journal 14th December 2012

For more than three years, business scribes have been musing about green shoots, economists have been reporting rising output and investors have been realizing sizable returns on their equity portfolios. Aggregate statistics had it that the recession had been beaten and economies were on the upswing even though, for many households, this good news seemed like it was happening somewhere else. Millions of jobs have vanished in the U.S., many permanently. Home-loan defaults piled up and ongoing corporate restructuring rendered the future of many workplaces uncertain. On the eve of 2013, many are asking if the recovery that started in the last months of 2009 will bring more stable relief in the coming year.

The answer may be not be a simple one. It’s true that a temporary lift beginning in 2009 provided some relief. But there were two sources of this upturn. Factories that idled when global demand collapsed sparked to life to replenish inventory. Massive amounts of government monies were partial compensation for weak private sector investment. In conjunction with public spending increases, taxes were slashed and central banks dramatically reduced interest rates. These were band-aid solutions, but they kept the recession from being even more cruel.

In the waning weeks of 2012, warehouses are fully stocked. Production essentially is on hold and waiting for signs that a fulsome demand for appliances, cars and clothing can justify a return to full production. But there is little chance of that happening until nervous consumers reduce their debt and re-establish some optimism. This seems less likely as long as unemployment remains high. In the interim, governments will not be able to fund the recovery much longer. The financial system has been flooded with cash as many central banks have cut interest rates to or near zero. While public spending can remain high, in most countries further increases would not be practical. So 2013 may not be the year of recovery that many are looking for.

Some economists see a much darker potential future that may involve the dissolution of globalization. The euro zone is at the heart of this bleak picture. The euro zone’s GDP is forecast to move forward by less than 0.5 per cent in 2013 with Germany and France barely advancing. The economies of Greece, Spain and Portugal have been shrinking for more than four years. One consequence of this global disaster is that anger continues to mount with political leaders, even in those countries not directly experiencing the harshest elements of the recession.

“The really worrying thing is a 40 percent chance the euro zone might break up altogether…over the next couple of years or so,” said Robin Bew, editorial director and chief economist at the Economist Intelligence Unit.

European banks have traditionally been the source of approximately 80 per cent of trade financing in emerging markets. In the shadow of the financial crisis, Europe’s undercapitalized banks are being forced to repatriate that capital. It is not clear that U.S., Japanese or Chinese banks are in a position to fill the gap. Capital scarcity combined with the need for banks to retain more capital is inhibiting global trade financing. This in turn threatens to accelerate the process of deglobalization.

In the U.S. economy, these adverse conditions do not provide the economic environment necessary to achieve the level of robust growth required for full employment. More disturbingly, the increase in economic and political stress resulting from the weakening of globalization serves to increase investor uncertainty. The increase of investor nervousness has made the financial environment even more risk averse.

Globalization, with all its faults, drawbacks and shortcomings, has been at the centre of prosperity creation for more than thirty years. There have been suggestions that the globalization model may already be obsolete in the United States, where exports are less than 15 per cent of total trade and where rapid Chinese wage inflation, automation, robotics, new software-based cost-cutting manufacturing technologies and the precipitous erosion of the power of organized labour has created conditions not yet fully understood. This phenomenon should set off alarm bells everywhere. Globalization is at risk of destruction, with no replacement in sight.


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Filed under Economics, Euro Zone, Fiscal Policy

The Feds on the Right Fiscal Path


Published in the Telegraph-Journal 16th November 2012

Finance Minister Jim Flaherty recently informed Canadians that the economy is growing more slowly than had been forecast.

This announcement could not have come as a surprise to anyone. Commodity prices are down, the euro zone remains a mess, the U.S. economy has not yet rebounded and some forecasts have the global economy growth prospects deteriorating in the near term.

All of this is a predictable consequence of the financial crisis that has continued for more than four years. Mr. Flaherty has responded to these realities by moving the federal government’s target for returning to balanced budgets from fiscal year 2015-2016 to 2016-2017.

Mr. Flaherty noted in his announcement that “despite the weak global economic environment, the government is on track to meet its commitment to return to balanced budgets over the medium term.” Many other nations would be thankful to have this bad news.

In the context of massive uncertainty and euro basket-cases, Mr. Flaherty’s announcement sounds eminently reasonable. So why are critics crying that Mr. Flaherty’s fiscal message represents nothing less than the end of the Conservative Party in Canada? And why is it that Conservatives are the harshest of these critics?

One answer comes down to party politics and looking ahead to the next federal election. Fiscal hawks in the Conservative caucus have been pushing for deeper and faster reductions in the federal deficit. The reasoning ostensibly is to give the party ammunition with which to campaign on a balanced budget in the next election. But federal government expenditure management has been more moderate as the economy’s growth waned.

While the objective of reducing the size of government remains a fundamental principle of Conservative ideology, its implementation has stalled. Reductions in departmental spending have eased and decreased transfers to the provinces are on hold, and no longer appear to be the highest priority in Ottawa. This means that Conservative hopefuls in the next federal election will not be able to wield a balanced budget as a weapon against their opponents.

To Conservatives who have subscribed heavily to the idea that fiscal austerity should be a hallmark of the party’s philosophy, compromise may propagate a credibility crisis. These Conservatives worry that they would have greater difficulty distinguishing themselves from Liberals and New Democrats.

The other answer is that Mr. Flaherty’s critics have an idiosyncratic perspective of the dynamics of the Canadian economy, the role that government plays in supporting growth and employment and how interdependent Canada is on its trading partners.

New job creation and growth depends largely on the private sector, where government’s function is deregulation and ensuring that government spending does not create an obstacle to that growth.

Restoring jobs lost by firms in industries that are in transition or temporarily under pressure is important as creating new jobs in new industries. In Canada, many of the companies experiencing slow growth – or no growth at all – are in the commodities sector, where prices are under pressure. These firms have experienced slower growth because of weakened global demand conditions, a decline in consumer incomes and low asset prices.

A prudent fiscal policy emphasizing a measured and gradual approach will help prevent the economy from falling into deeper or a more prolonged recession even if it does not please fiscal hawks. Macroeconomic stimulus also serves to preserve jobs in existing industries, which in turn serves to support new business formation.

While the economy remains weak, as is the case in Canada today, excessive austerity will delay growth and serve to act as a damper for job creation.

Mr. Flaherty is right to have chosen a moderate fiscal path.

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Filed under Euro Zone, Fiscal Policy