In a spin. A bearish perspective on the market in 2011

Dec 29th 2010 | from PRINT EDITION
Economist.com/blogs/buttonwood

BEFORE reality TV ruled the airwaves, the Saturday night schedules on the BBC would often feature a variety show with singers, comedians and novelty acts. One favourite was a man spinning plates on top of poles, an act that involved a lot of dashing about to avoid disaster.

Central banks have been performing a version of that act for the past three years. In 2008 they were racing around trying to save one bank after another, and were unable to prevent a few smashes. In 2010 the fragile plates were the sovereign countries of the euro zone. The authorities just managed to keep them intact.

But the loss of just one tiny saucer could result in a lot of broken crockery. The banks are still in a delicate state with many dependent on the European Central Bank (ECB) for finance. The advice of Walter Bagehot, a 19th-century editor of The Economist, was that central banks should lend freely in a liquidity crisis, against good collateral. But this support was supposed to be short-term, not continuous: a central bank should be an emergency room, not a hospice.

Indeed, for all the efforts of governments and central banks, many of the global economy’s long-term problems have yet to be solved. The banks are weak, the American housing market is still in the doldrums and the global imbalances have not gone away.

Just as the ECB bought time for European banks, rescues have been attempted for the struggling governments of Greece and Ireland. But these seem like temporary expedients: lending the countries money for extended periods at rates neither can afford. The packages have not been sufficient to calm the markets or stop the rot from spreading: 2010 ended with Fitch downgrading Portugal and putting Greece on negative rating watch.

The rest of Europe is now talking about imposing penalties on private-sector lenders in future rescues. That will turn each crisis into a game of chicken as bondholders sell before they get penalised. And financing packages do not deal with an underlying lack of competitiveness in many European economies. Without the ability to devalue, the restoration of competitiveness requires painful austerity measures and wage restraint.

That leads to another potential flashpoint for 2011: the lack of global co-ordination. Gone is the consensus seen at the G20 meeting in April 2009. Europe will be pursuing austerity, China is trying to rein in bank lending but America has opted for another fiscal stimulus. This is a throwback to pre-crisis 2007, with American deficit-financed consumption set against Chinese surplus-creating exports.

It seems certain that the Federal Reserve will continue to accompany fiscal stimulus with the monetary equivalent in the form of near-zero interest rates and further quantitative easing. The need for such extraordinary measures is an indication of how weak the economy continues to be. But while the developed world is still fighting off deflation, the developing world is worrying about inflationary pressures, with gold near $1,400 an ounce and oil back above $90 a barrel.

Easy monetary policy in America also creates the incentive for further speculative money to flow into emerging markets via carry trades and other strategies. That creates a dilemma for developing-country governments: they may want to head off inflation with higher interest rates but that would only encourage the speculators. Some have tried capital controls instead but it is not clear such measures are effective. Bubbles in emerging markets are likely to develop in 2011.

Whether all-out currency wars (in the form of trade protection) will emerge in 2011 is harder to tell. The aim of most developing countries is to prevent their currencies rising against the dollar at a faster pace than the Chinese yuan. Oddly enough, the European fiscal crisis eased some of the strains in late 2010: a weaker euro meant a stronger dollar.

But it is quite possible that the dollar could suffer another round of weakness in the coming year. After all, the currency has no yield support, a continuing trade deficit and the prospect of endless fiscal deficits. The sorry condition of municipal and state finances could yet be the trigger for a loss of confidence.

This list of problems is the reason why it is so hard for Buttonwood to join the bullish consensus for 2011. The authorities have kept the plates spinning by dint of an enormous effort and some unprecedented monetary measures. But the underlying problems have not been solved. And the law of gravity cannot be suspended for ever.

Economist.com/blogs/buttonwood

from PRINT EDITION | Finance and Economics

Contraction de plus de 10% du commerce mondial en 2009, estime Lamy

[ 07/12/09 - 09H53 - actualisé à 09:53:00 ]

(Source : LESECHOS.fr)

Le directeur général de l'OMC a admis que les gouvernements avaient réalisé des progrès pour lutter contre la crise, mais qu'ils "étaient encore trop lents"

Le commerce mondial devrait se contracter cette année de plus de 10% en raison de la crise économique mondiale, un chiffre "sans précédent", a averti à Séoul le directeur général de l'OMC, Pascal Lamy.

Tout en admettant que les gouvernements avaient réalisé des progrès pour lutter contre la crise, le responsable a estimé que beaucoup restait à faire. "En février de cette année, la crise avait atteint son faîte", a déclaré Pascal Lamy, lors d'un forum dans la capitale sud-coréenne. "Moins d'un an plus tard, des progrès ont été accomplis, mais nous ne sommes pas encore tirés d'affaire", a-t-il ajouté, regrettant que "le processus de nettoyage en est à mi-chemin, mais les progrès sont encore trop lents".

Le bouclage des négociations du cycle de Doha est crucial

Dans ce contexte, "les pressions pour l'adoption de mesures protectionnistes... avec leurs gains illusoires pour les économies nationales, ne vont pas disparaître de sitôt", a-t-il poursuivi. Le patron de l'OMC a estimé à ce sujet que boucler les négociations dites du cycle de Doha sur la libéralisation des échanges avant fin 2010 était crucial.

Mais, "cela ne se produira que si chacun est disposé à faire de sérieux efforts", a-t-il prévenu. Les négociations sont en effet au point mort depuis des mois en raison de l'absence notoire d'implication des Américains. Une réunion ministérielle de l'Organisation mondiale du commerce la semaine dernière à Genève n'a pas permis de sortir les négociations de l'impasse.

Pascal Lamy avait reconnu que des "divergences" existaient toujours entre les 153 membres de l'OMC et qu'il était encore trop tôt pour fixer un calendrier à la négociation en 2010. Les ministres se sont engagés à évaluer au printemps prochain les progrès accomplis depuis le début de leurs discussions en 2001.

Les Echos (Source : AFP)

Pay for delay

Economics focus

Nov 5th 2009
From The Economist print edition

Wage subsidies and fatter jobless benefits have softened the impact of the recession but may yet hurt recovery

AMERICA may lead the rich world in periods of prosperity, but Europe has shown a greater talent for dealing with recession. Unemployment in the euro area has risen by 30% from its pre-crisis levels. America’s jobless rate has more than doubled. In Germany, the largest country in the euro zone, output fell far harder than America’s during the worst months of the crisis but Germany’s unemployment rate barely rose. Consumer spending has held up surprisingly well in a country where high saving is the norm even in good times. “Germany is calm,” says one official with satisfaction. By comparison, America is deeply troubled.

What explains the resilience of continental Europe? Some of it was already built-in. Job-protection laws make it costly for firms to lay off workers, and where posts are sacrificed, the newly unemployed are preserved from penury. They receive benefits worth around two-thirds of their lost salaries in most countries. Only in Italy are benefits anywhere near as skimpy as in America and Britain, where new claimants receive just 28% of their previous earnings. European governments also have fewer qualms about intervention. A new report from the OECD identifies 14 kinds of job-market initiatives put in place since recession struck. France ticks 12 of those boxes, more than any other country.

One policy in particular has helped keep a lid on unemployment. Schemes that subsidise the wages of employees working fewer hours than normal were introduced or expanded in 22 of the 29 countries surveyed by the OECD. Germany had around 1.4m workers on its short-time working scheme by the summer, equivalent to a cull of 400,000-500,000 full-time workers. That would add one percentage point to the jobless rate. Countries without these arrangements, such as America, Britain and Spain, have tended to suffer bigger rises in unemployment (see chart).

In normal times, wage subsidies would be frowned upon. But in a credit crunch they can be a smart use of fiscal resources. Firms worried about future sales, low on cash and deprived of credit, may too readily fire workers without a subsidy. That would only add to a downward spiral of confidence and spending. In Europe, the state funds generous jobless benefits in any case. Why not instead make it easier for firms to hoard workers and keep a skilled workforce intact for when the economy turns?

All policies have drawbacks, and those that help economies to absorb a shock will also tend to make the damaging effects linger. Subsidising jobs that are no longer viable will hold back recovery. The flow of workers from dying industries to new ones may be blocked. If sustained for too long, short-time working schemes can become artificial props for industries that need to shrink. A scheme in Spain, say, to pay construction firms to hoard workers would be madness when there is a glut of empty homes.

Firms may also be tempted to use wage subsidies as a cheap way of keeping their options open at the government’s expense. A well-designed scheme can curb this. In the Netherlands, businesses that lay off workers within three months of the scheme’s end have to pay back half the subsidy. The more workers that firms register for support, the sooner the subsidy runs out. A Swedish policy to prevent lay-offs due to weak cashflow looks even smarter. Instead of wage support, Sweden gives its firms the option to delay their social-security contributions. A punitive interest charge for firms receiving such help would root out all but the truly distressed. Other countries have trimmed their taxes on jobs in addition to (or instead of) wage subsidies.

Working hypothesis

Another way of softening recession is to expand the welfare system. Around half of the rich countries in the OECD survey have done so since the crisis began—by raising benefits, making it easier to claim them or providing for longer. Extra money for the jobless is an effective stimulus measure since cash-starved households are likely to spend it. But if benefits are kept high for too long they will make the jobless less keen to search for work. One way of striking a balance between short-term stimulus and long-term incentives is to increase the value of benefits but withdraw them sooner. That is what Poland and the Czech Republic have done. The recession’s length has forced America’s government to do the opposite. It used to offer just six months of jobless benefits, but has extended its support to stop people falling into poverty.

It may seem heartless to counsel against too much support for the unemployed but incentives matter even when unemployment is high. Firms in rich countries make hires equivalent to some 14-15% of all employment in deep recessions, according to the OECD. (Net job creation falls because there are more lay-offs.) More generous benefits will mean vacancies are filled less quickly, pushing up unemployment. Active help for those on benefits—training, counselling and so on—can also be neglected in recession. Switzerland and Denmark link spending on such policies to their jobless rates to ensure that a fixed amount of spending is not shared between a larger pool of unemployed.

Evidence from past deep recessions suggests that unemployment is unlikely to fall as quickly as it has risen. Indeed further increases seem likely in Europe, because jobs have not adjusted much to a lower level of GDP. In those circumstances, the temptation to prolong wage subsidies and buttress benefits will be great. It should be resisted. The unemployment rate in the euro area has risen far less than America, but both are now close to 10%. Pre-crisis rates in Europe were higher precisely because of its rigid jobs markets. It would be a shame if measures that have helped mitigate crisis were left to spoil prospects for recovery.