Despite continued growth in emerging economies, the apparent stabilization of financial markets and trillions of dollars in stimulus spending, the global economic recovery is slowing down amidst political crises in both the United States and European Union (EU). This week we talk to CIGI Senior Visiting Fellow Paul Blustein, a former Wall Street Journal and Washington Post world economy correspondent, about the political courage needed to restore confidence on both sides of the Atlantic, and how global governance could help to do so.
CIGI: Global indicators suggest that worldwide economic growth is at its weakest since the recovery began almost two years ago. Though the news is not entirely gloomy, there seems to be a growing lack of confidence in the politicians handling the recovery, particularly in Europe and the United States. Do you view the current slowdown as a speed bump on the road to a true recovery, or are there still structural flaws in the world economy that are preventing sustainable growth from occurring?
Paul Blustein: The financial crisis left many major economies burdened with enormous debt, and overcoming that problem is going to require some very deft maneuvering, so obviously a lot depends on how policy makers respond. Right now, I don’t see a lot of grounds for optimism. The situation in the eurozone is particularly difficult to contain, and politicians seem a lot more interested in appeasing their angry electorates than generating sustainable solutions.
As for the US, I’m a believer in the argument that I hear from just about every common-sense economist, namely that stimulus is needed in the short run and very serious fiscal discipline is needed in the long run. Instead, it looks like we're going to get the opposite — near-term austerity, or at least an insufficient amount of stimulus, and very little cooperation on long-term fiscal policy.
CIGI: As you mentioned, in the United States economic recovery seems to be particularly slow and politically contentious. After spending much of your reporting career in Washington, do you feel the current climate of austerity is a political reaction to public outrage over increased government spending, or does it stem from a real desire to ensure the country’s long-term economic viability?
Blustein: The political climate stems from a number of factors, but prime among them was the bailout of the banks, which really shocked people’s sense of morality, and rightly so. It completely offended their idea of the proper role of government. Even though those things were necessary to prevent something worse from happening, it’s a perfectly understandable reaction. Unfortunately, a lot of voters have drawn the conclusion that the US is becoming practically socialistic, and that all forms of government must be cut back. On top of that — and this is all part of the same phenomenon — Republicans are rejecting all forms of tax increases; even those who know in their heart of hearts that higher taxes wouldn't be so terrible are afraid to say so because of how the party base would react.
I don't mean to suggest that Republicans are showing no political courage — after all, many of them have endorsed some astonishingly controversial changes in Medicare. But given the political reaction to those proposals, it's clearer than ever that you can't solve the deficit problem with spending cuts alone. Getting even sensible Republicans to acknowledge that reality, especially now that the election season is heating up, just doesn't seem possible.
CIGI: In the eurozone, an even more complicated economic picture is unfolding, potentially with even greater political paralysis and consequences. What can global financial institutions do to help solve a problem confounding European officials, and ultimately threatening the global economic recovery?
Blustein: The fundamental question here is what ought to be done in Greece and the other peripheral eurozone countries. I accept the idea — because of the book I wrote about the Argentine crisis of 2001-2002 — that when a country's debt burden is just too much for its political system to bear and there's virtually no hope of reversal, you’re better off facing that reality and restructuring their debt in a meaningful way.
The IMF needs to go in and knock heads together, because leaders in other European countries are understandably terrified of the political consequences if a Greek debt restructuring creates new problems for their banks and they have to ask their taxpayers for another bailout. Instead of supporting unsustainable programs as the IMF has so far, a truly global institution would tell the Europeans that IMF funds, and IMF credibility, will be provided only after both Greece and its creditors are prepared to accept reality.
And here's the really discouraging part: Now that there’s an opportunity for new leadership at the IMF, Europeans are insisting that one of their own take over. I’ve met Christine Lagarde — I admire her and think she’s very able — but she is unquestionably indebted to the leaders of Europe for the position she’s in, and presumably has aspirations for other electoral or appointed jobs in France or Europe down the road. She ought to be prepared to be just as unpopular in Europe as previous IMF managing directors have been in countries like Brazil and South Korea, but she knows that her future will be compromised. That's not a promising set of circumstances for sensible policy making.
CIGI: So with politicians having to face up to domestic political considerations that may diverge from the best interests of the world economy, does this ultimately make the case for stronger global economic governance, both at the IMF and in other bodies like the G20?
Blustein: In an ideal world, you come back to John Lennon — imagining a world with no countries. Nations cherish their sovereign rights to make decisions, and even in the European Union, domestic politicians are understandably recoiling from relinquishing authority to others in Brussels and elsewhere. Economists can make a good case that their individual countries, and all of Europe, would be better off if they did, but it’s utterly unrealistic.
In my research, I’ve come across an interesting example of global governance that really worked. The Financial Stability Forum managed to change the practices of offshore business centres in the Caribbean — it wasn’t tax enforcement, but getting them to cooperate on financial regulation. There was a fear of them being hotspots of financial instability around the world, so the G7 and other wealthy countries threatened them with sanctions, and lo and behold, the smaller island nations fell in line with the regulations. And they did for good, self-interested reasons.
Globally, we don’t have any group with that kind of enforcement power. I’m very skeptical that the G20 will be able to accomplish meaningful mutual surveillance, which is usually more like mutual back scratching. The EU is a perfect example. Nobody wants to call anyone on bad behaviour, because they’re worried the same thing is going to happen to them. So I doubt that the G20 will be able to do what the G7, G8 or IMF failed to do before the crisis.