On the IMF, sprints, marathons and hybrids
A funny string of recent events have captured my attention. And it involves the IMF and politics. May be far fetched but a warning as well towards various addressees, either politically, economically or both. And the IMF is balancing here on a thin line judging the noises we are recently hearing.
First of all there was Christine Lagarde recently stating the following at the German Council of foreign affairs in Berlin : It's about avoiding a 1930 moment, a moment ultimately leading to a downward spiral that could engulf the entire world. And she urged as well for an expansion of the bail-out fund without mentioning any names. But it surely was a hint towards Germany to either step up efforts in funding this bazooka fund or to support jointly issued eurobonds in the near future. So far, radio silence from the side of Angela Merkel, supporting a classic ancient Bundesbank quid pro quo point of view : first things first, put the house in order and then speak about fresh money being put on the table.
Yesterday, the IMF once again came forward, this time on the business cycle outlook and measures to be taken (or rather not to be taken). In its latest 2012 forecast, the IMF downgraded its autumn 2011 forecast considerably from 4% to 3,3%, yet still better than the Worldbank last week (2,5%). The IMF kept its outlook for the US (1,7%) and lowered the forecast for the rest of the world, emerging included. But most of all, Europe would enter (has entered) recession. And here, an IMF study from Cottarelli-Jaramillo, released simultaneously, states the following : Though certain countries like Germany, France, Spain and Italy have somehow managed to reduce their structural deficits - thanks to austerity - we risk to make Europe's crisis worse. And there you have it, the classic debate on the merits/disadvantages of austerity on macro growth level, short/long term. Turning to athletics, Olivier Blanchard - Chief economist of the IMF and known for his hysteresis analysis of structural unemployment - stated the following on the same issue : "We advise countries that haven't been cut off from markets to avoid further discretionary austerity. Decreasing debt is a marathon, not a sprint. If you go too fast, you will kill growth" .
Does the IMF have a point and if not, why the statement ? First of all looking at the the global measures so far on austerity, the results are not promising, so far . And this is important in the debate, being time and do we have time. Those left of the centre will argue that looking at some countries in Europe, austerity has not generated the targeted benefits in terms of growth. And also outside the euro-zone, the UK is a good example, confirming today it's moving back into recession. Only for Ireland, the jury is still out with maybe a slightly better outcome. But for me the point goes further : austerity is not a luxury but necessary to clean things up and prepare ourselves for bigger budgetary challenges going forward. And if politicians had looked further than their nose, they would have seen these things coming (regardless the financial crisis) and had some reserves to run deficits when necessary, and run subsequently surpluses when the good times roll. So you probably get worse in the short term when austerity strikes, but could structurally benefit in the medium/long term. Big question : One, how to implement austerity and be careful that next to fat you don't cut away muscles ? Two, how at the same time generate a growth kicker which doesn't cost too much in budgetary terms ? Three, will markets give you sufficient enough time to prove yourself (not evident these days) ?
I think that's where the IMF moves in and therefore their statements should certainly be seen as a political call. Yes, both Lagarde and Blanchard are French, but it goes further than that. The IMF not only gives Europe a relief but also a blanc check to the US and hence Obama not to move significantly in this vital election year (for those who forgot : US is in no better shape either, certainly not on the budgetary front). And in combination with yesterday's Fitch appearance in European Parliament, the European inspired IMF move comes as no surprise either. Fitch yesterday tried to defend the rating agencies' strategies and attacked the European initiative on regulating credit rating agencies "which could have unintended consequences". My guess is that the IMF is openly trying to hush Fitch, Moodys and S&P - and most likely behind the scenes as well. And if successful, both Europe and the US have bought some precious time into 2012 without the rating agency PITA effect (pain in the...).
A final word on austerity and hybrids. Last weekend, the Economist had an interesting 18 page special on the rise of hybrid capitalism, also known as state capitalism. So far it seems that this model has had its merits since the crisis outbreak in 2008. In fact, some big economies (BRIC etc) let their deficits run and were a supporting factor for the soft recession in certain pockets of the world and the global recovery which followed. Not all are comparable, with very different organizational structures and policy approaches. And of course it is not a 100% euphoria story with big challenges going ahead. The challenge in fact is to reconcile the pros of both systems into a win-win and that is not an easy exercise (for exemple Bolsa Familia Brazil => subsidizing lower class families provided children go to school). The Economist makes the following statements which should be taken to heart I believe
"The defining battle of the 21st century will not be between capitalism and socialism but between different versions of capitalism. And since state capitalism is likely to be around for some time yet, Western investors, managers and policymakers need to start thinking how to deal with it"
"But state capitalism's biggest shortcoming has to do with liberty. More precisely, it turns companies into governmental organs and therefore concentrates power (and corrupts). It introduces commercial criteria into political decisions and political decisions into commercial ones (note : cfr Dexia). Briefly, when the little republics and the big republic are one and the same, liberty is fatally weakened"
And these last quotes for me have nothing to do with Left or Right because history has plenty of examples when it went wrong on both sides of the political center: just have a look at what happened on a global scale post 1929, with each time liberty being the biggest casualty. Let's hope 2008-2011 is no dress rehearsal for something similar and maybe worse waiting to happen.