Rebounding global economy, the 2013 edition

Published: Friday | September 14, 2012 Comments 0
Wilberne Persaud, Financial Gleaner Columnist
Wilberne Persaud, Financial Gleaner Columnist

By Wilberne Persaud, Financial Gleaner Columnist

Despite, or
rather, because of nervousness among investors and on currency and capital markets, on July 26, Mario Draghi, president of the European Central Bank (ECB), said Europe remains ready to do within its mandate "whatever it takes to preserve the euro. And believe me, it will be enough".

Considering the potential future of the euro, many continued to feel and express doubt about the capacity of the 17-member union to sustain the common currency in face of the big fiscal and political problems associated with attempts to fix it in Greece, and high borrowing costs confronting members like Italy and Spain.

But on Wednesday, Germany's DAX, the blue-chip stock market rose as the country's Federal Constitutional Court's ruling was announced: Germany could legally contribute €190 billion (US$240 billion) to the European Stability Mechanism - a kind of International Monetary Fund for Europe.

It will oversee and manage financial-rescue operations working with the ECB to buy for instance, Italian and Spanish bonds which allows those countries to avoid unsustainably high interest rates currently demanded by financial markets.

The DAX measures performance of the 30 largest German companies trading on the Frankfurt Stock Exchange. It uses the volume of their order book, or future business outlook, and market capitalisation to do so. This is confidence writ large. The European project would after all, continue with its fitful, even to some, improbable march towards integration.

Draghi, as ECB president, had almost broken the central bankers' unspoken pledge to stay completely above and beyond politics in his July 26 speech.

But Wednesday's court ruling provided German Chancellor Angela Merkel not only a notable legal, but also a political victory in her attempt to come to terms with the debt crisis that has stricken the union for years.

Merkel actually delayed an address to Parliament so she could speak of the court's ruling. Surely the court gave her no advance report; nevertheless she was confident.

And when she spoke, she said: "Once again, Germany today sends a strong signal out to Europe and the world beyond - Germany is decisively true to its responsibility in Europe as the largest economy and a reliable partner."

Even if France's Société Générale does rid itself of its almost 100 per cent stake in Geniki Bank, one the biggest Greek banks, and Crédit Agricole sells off its Greek operation, this is a huge shot in the arm for confidence in Europe's commitment to the integration project, demonstrating the political will and reality to make it work.

The point is, in good times, the European banks made it their expansion strategy to move into southern Europe benefiting from and participating in rapid economic growth and buoyancy of a housing bubble as in the United States. They shall have to sustain some losses.

Isn't that the way of business - win some, lose some?

This ruling and Germany's political commitment, coming so soon after US Federal Reserve Chairman Ben Bernanke told the Federal Open Market Committee on August 31 that he was open to using monetary policy to counter anaemic US job growth, makes it the best news for the global economy in a long while.

The question before Germany's Constitutional Court was whether the European Stability Mechanism weakened Germany's Parliamentary control over spending taxpayers' money. There was opinion in the country in support of this view. The ruling finally puts paid to the idea.

But the news is not all good - seemingly. For Moody's Investors Service says it will likely cut its 'Aaa' rating on US government debt should budget negotiations fail. This is what US political and economic pundits now refer to as approaching the 'fiscal cliff'. Republicans don't want the unfunded Bush tax cuts to go. Democrats do. The US deficit needs this to happen.

If no agreement is struck, at January 2, 2013, something like US$1.2 trillion in spending cuts and tax increases automatically kick in. And it is argued, this will be falling off the fiscal cliff. The economy drops back into recession, unemployment ratchets up.

Yet this may not be bad news at all. The US deficit and expenditure decisions will no longer be entirely subject to Republican intransigence at the expense of both the US and global economy.

Recall that last year Moody's changed its outlook on US debt to "negative" when quarrelling over raising the US debt limit moved the country to the brink of default. This caused no meltdown.

Indeed, Moody's telescoping conditional intent may well be good news if it pushes contending foes towards reason, sound, tried and tested economic policy as opposed to reliance on rampant ideology!

Wilberne Persaud is author of 'Jamaica Meltdown: Indigenous Financial Sector Crash 1996'. Email wilbe65@yahoo.com

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