On June 25 and 26, 2013, the Institute of
International Finance held its spring membership meeting in Paris.
The third discussion dealt with the current state, outlook, and risks
for the major economies in the world.
Axel A. Weber, Chairman,
UBS AG
Axel Weber delivers a very fact-based, if not
unemotional speech. He introduces the discussion by quickly
mentioning the major current evolutions in the world economy:
- The Euro is still in an extended recession, although its financial markets have stabilized.
- The US is closer to “self-sustainable recovery” and debates about unwinding exceptional monetary policy measures.
- Unprecedented steps of the Bank of Japan and a slower growth momentum, especially in China, mark the Asian economy.
What’s more, the world economy today shows
divergent economic policies in different countries, triggered by
varying stages of the economies’ business cycle.
Quotes:
“The economic outlook has
improved since last year but the recovery is still fragile.”
“Currencies ideally
should reflect economic fundamentals and the relative strengths of
the economies and should actually act as a stabilizing mechanism in
the world economy. But in a condition of extreme monetary policy
measures in many jurisdictions, this may distort the picture and,
going forward, it might also distort the way exchange rates move
between major trading partners.”
Dr. Olivier Blanchard, Economic Counsellor
and Director, Research Department, International Monetary Fund
Olivier begins his speech strikingly by
describing 3.5 stages of today’s economic recovery:
- Emerging markets are doing best.
- The US is doing ok.
- Europe is doing poorly.
- Japan is somewhere in-between.
Even though emerging markets currently
show the best economic performance, it is getting less strong than we
are used to. Dr. Blanchard is wondering – Is this decrease
cyclical? – and doesn’t give a clear answer: “Although
there are differences from country to country, the bottom line is: It
is a decline in potential growth with some cyclical components.”
As regards declining Chinese exports, they have
been compensated by increasing investments: As a matter of fact, the
Chinese investment rate has moved from 39 % in 2007 to 45 % today.
The question is, however, whether such a high rate will be
sustainable.
A decreasing growth of the BRICS should also
worry the USA and the Eurozone: The IMF predicts that a 2 % decrease
in BRICS’ growth would lead to a 0.5 % growth decrease in the US
and the Euro area.
In the US, “recovery
is there, private demand is strong, and fiscal consolidation is at
break“.
Olivier Blanchard’s appreciation of the
European economy is best described by the term “hope”.
Above all, periphery countries still need to improve their
competitiveness and increase internal demand.
In Japan, the central bank currently tries
to grow aggregate demand through lowering real interest rates. In
Olivier’s view, it will actually take a long time for this monetary
policy (“abenomics”) to prove successful. In the meantime, it
generates a lot of volatility in Japan and, by implication, in the
world economy.
Quotes:
“We clearly have a world
with divergent [economic] evolutions.”
“Uncertainty is part of
the game.”
“[The USA] is an economy
that is recovering.”
“The right word [to
describe the state of the European economy] is still working
progress.”
“In the core, the numbers
are really bad, but there are some reasons to believe, going forward,
that they are getting better.”
“It's going to be a long
time before we actually know whether “abenomics” work.”
Dr. Ethan Harris, Co-head of Global
Economics Research, Bank of America Merrill Lynch Global Research
Ethan draws a positive picture of the US economy,
saying that the US is close to a self-sustained economic recovery,
namely driven by a stronger housing market.
In his view, the main recovery factor in the US
is the accommodative monetary policy of the FED, because it has
allowed households and companies to improve their balance sheets. Dr.
Harries believes that an exit from the current monetary policies will
not be made quickly, at the earliest by the end of 2014.
Today, the main challenge in the US is to cut
government spending; Ethan calls this the “fiscal
shock”. This leads the speaker to a blunt critique of US
politicians: Ethan says that politicians have repeatedly made abrupt
shifts in economic policy which were and are very bad for the
confidence in the US economy.
Quotes:
“There is no question
that we [the US] are getting closer to a self-sustained [economic]
recovery.”
“The most bullish sign in
the US is the recovery of the housing market.”
“Washington will become
less of a negative factor.”
“I sometimes tell clients
that the best thing that could happen to the US would be to cut off
Washington and to push it into the Atlantic Ocean. But I don't want
it to go too far and make it to Europe.”
“My hope is that – well
– Washington won't be very productive –, at least, it won't be
counterproductive.”
“I think that the message
the markets will get [from the FED as regards exiting accommodative
monetary policies] in the coming months will be: We're in no hurry
here!”
Dr. Otmar Issing, President, Center for
Financial Studies
Otmar Issing concentrates on the situation in
Europe and identifies interest rate spreads between companies in the
center of Europe and the periphery as the most decisive challenge
Europe faces today. However, those spreads are not linked to monetary
parameters of the common European currency but to national economic
policies and sovereign risk. Therefore, significant reforms at member
state level are necessary today. But carrying out necessary reforms
is subject to moral hazard: All too often, individual countries
neglect the need for reforms unless they are faced with unsustainably
rising interest rates.
In the second part of his talk, Otmar turns to a
fundamental lack of the common European currency that he calls a
“currency without a state”. In this
view, Eurozone member states will have to transfer more elements of
sovereignty to the EU level to provide democratic legitimacy to a
common monetary policy. However, he takes a rather critical position
on the question whether member states will be willing to do so.
Quotes:
“In my interpretation,
the Euro area is at a fundamental crossroads.”
“When the Euro started,
it was called a currency without a state.”
“As soon as taxpayers'
money is included, you come to the question of sovereignty and
monetary policy.”
“It's [monetary decisions
on interest rates] taxation without representation. […] This is not
the way Europe should go.”
“I'm not sure how many
countries will finally be ready to transfer fundamental elements of
sovereignty to the European level.”
“We are in a crucial
moment of the [European] institutional setting.”
Stephen King, Group Chief Economist, HSBC
Stephen analyzes the economic situation in the UK
and China.
His opinion on the UK economy is very
negative; pointing out that no significant recovery has taken place
over the last years. Obviously, the main basket of the UK economy,
the financial sector, experiences currently low or even negative
growth rates and this affects other key sectors in the UK, namely
construction and the public sector.
As regards the Chinese economy, its
tremendous growth was, prior to the financial crisis, driven by
growing exports. After the financial crisis, falling exports have
been compensated by increasing government spending, namely in the
infrastructure sector. In the speaker’s opinion, this increases the
risk of financial bubbles as well as the realization of tail risks.
Ultimately, China’s growth will shift from a purely quantitative
growth to a more qualitative (meaning growth based on market-based
prices for inputs) growth.
Quotes:
“The UK is actually an
emerging market in some way or another.”
“For the UK, there have
been elements of wishful thinking over the last few years –
optimism bias.”
“Each year, the forecast
[for the growth of the UK economy] is virtually the same: Next year
is the first year of recovery. It's just that next year never
arrives.”
“The quality of growth
[in China] has been declining [since the financial crisis].”
“The intention to reduce
tail risk in the longer term certainly leads to lower short-term
growth rate [in China].”
“From the point of view
of the global economy, there has been a kind of increasing dependence
on the assumption of China being strong. […] That raises new risks
for current account funding in some parts of the emerging world.”
François Pérol, Chief Executive Officer
and President of the Management Board, BPCE
Francois emphasizes the importance of common
policy measures in Europe. In his view, the absence of a common
budget and a common economic policy is a huge bet on the Euro.
On the negative side,
- Francois wonders whether economic imbalances within the Eurozone (for example full employment in Germany vs. very high unemployment in Greece and Spain) are tolerable, from a social point of view.
- Recessions are deepening in Eurozone periphery countries.
- Even in the core of the Eurozone (namely Germany and France), economic activity is slowing down.
On the positive side, financial markets are less
nervous since Mario Draghi’s “Whatever it takes” announcement
and seem to think that the risk on the common currency has now faded
away.
Towards the end of his speech, Francois Pérol
specifically comments on the European banking regulation. In his
view, reforms are highly important but focus too much on capital
markets. As Europe still finances its economy predominantly through
banks and a transition towards a capital-market based financing model
will take time, today’s regulation should not ignore the necessary
transition period.
Quotes:
“No common budget, no
common economic policy, but a common currency. Maybe we did not know
that at that time, but it was a huge bet.”
“Is this level [of
differences in unemployment rates within the Eurozone] socially
tolerable?”
“It is not possible to
make fundamental institutional moves [in Europe] without the
agreement of the people.”
“We need a fully loaded
and full-fledged banking union, meaning a single supervisory
mechanism and a single resolution rule.”
“It must be reminded that
the Eurozone is still a credit-based economy. It is not yet – not
yet – a capital market based
economy.”
“[The European banking]
regulation is mainly made for a capital-market based economy – But
this is not the state of the art [in Europe] and we need a
transition.”
Resource:
If you work for a member institution and register
with the Institute of International Finance, you can watch or
download the speeches here.
