Blogs: Kathleen M. Packard
European leaders recently gave a thumbs up to Greek crisis-management efforts and released a large package for aid for the Greek government to reduce government debt. German Chancellor Angela Merkel has visited Athens and blessed the country’s reform efforts. And no one rioted.
Meanwhile, the Greek economy languishes.
The New York Times’ Niki Kitsantonis has written “With scant opportunities in a suffering private sector, with unemployment at a record 28 percent – and above 60 percent for those under 24 – many Greeks have stopped waiting for those in power to put the country back on its feet.”
Kitsantonis noted: “Although thousands of enterprises have buckled under pressure of a deepening recession now in its sixth year, thousands of others have opened, in defiance of that bleak narrative. According to government figures, more than 41,000 companies were formed in Greece last year. Most of those were food or clothing retailers or other types of businesses that few experts would consider entrepreneurial innovators.”
The Economist reported: “The journey has been an epic one, but Greece has reached, if not the destination, at least a waymark. The last time that its government raised long-term funds was in March 2010, just weeks before the markets lost confidence in Greece altogether, forcing its first bail-out. This week the Greek government returned to the markets, raising €3 billion ($4.1 billion) in five-year bonds at a yield of just under 5% in a heavily oversubscribed issue.”
The amount might be small and the yield high compared with borrowing costs in other rescued countries, such as Portugal, whose five-year notes were trading at around 2.6%. But the notion of any bond issue at all still prompts eye-rubbing, given the depth of the Greek crisis. Six consecutive years of recession have seen the economy shrink by a quarter, prompting social and political turmoil that at its worst seemed quite likely to push Greece out of the euro zone. For most of the past four years a return to the markets on any terms seemed inconceivable, a view underscored by vaulting bond yields (see chart).
The Economist added: “If Greece has come a long way from those dark days, it is still far from being able to support itself financially. Like the rest of southern Europe it has gained as investors take a more favourable view of the euro zone and also anticipate possible quantitative easing by the European Central Bank.”
The International Monetary Fund recently forecast that Brazil’s economy would grown only by 1.8 percent in 2014. Standard and Poor’s recently lowered the rating of the country’s sovereign debt to BBB. This is bad news for a country that grew by only 2.3 percent in 2013, and 1.0 percent in 2012 – after growing 7.5 percent in 2010 and 2.7 percent in 2011.
Such low growth in the world’s seventh largest economy comes despite heavy spending for the upcoming World Cup this year and Olympics in 2016. The Wall Street Journal’s Luciana Magalhaes and Rogerio Jelmayer wrote: “Brazilian Finance Minister Guido Mantega blasted critics of his country's World Cup preparations and vowed that Brazil's economy would revive from its lethargy, for which he mainly blamed outside forces.”
Mr. Mantega rejected any idea that government policies contributed to the slowdown, mostly blaming it on the downturn in the global economy, starting in 2008. He said President Dilma Rousseff's government has taken steps--such as a big stimulus package--to help Brazil avoid an even deeper slowdown.
More investment would flow now that the currency has stabilized at a lower rate after a large decline last year, he contended. "As the exchange rate has stabilized, it has become more convenient to invest in Brazil," Mr. Mantega said.
Brazilians themselves are skeptical of the impact of the infrastructure spending. The New York Times Simon Romero wrote: “As Brazil sprints to get ready for the World Cup in June, it has run up against a catalog of delays, some caused by deadly construction accidents at stadiums, and cost overruns. It is building bus and rail systems for spectators that will not be finished until long after the games are done.
But the World Cup projects are just a part of a bigger national problem casting a pall over Brazil’s grand ambitions: an array of lavish projects conceived when economic growth was surging that now stand abandoned, stalled or wildly over budget.
Businesses that offer less dramatic expenditures, however, are growing in Brazil. Social media is the showcase example. The Wall Street Journal’s Loretta Chao reported: “ Brazil a bright spot for social-media companies as they seek more growth outside the U.S. and Europe. Brazil is particularly appealing because China, the world's biggest emerging market, currently blocks sites like YouTube, Facebook and Twitter, preventing the companies from cashing in on the nation's fast-growing economy.”
Perhaps it is time for Brazil to think small.
Europe is still stagnant. The New York Times’ Liz Alderman wrote: “Even as signs of an economic recovery emerge in the euro zone, the human cost of the five-year downturn continues to rise. For tens of millions of Europeans, the comeback from nearly five years of economic privation and Depression-scale joblessness will not be easy. A growing number of people, in Greece and other battered euro zone economies, are caught in the trap of long-term unemployment, drained of savings and living on the economic and social edge.
Greece, of course, has been hit the hardest: Its unemployment rate stills hovers above 27 percent. But the social challenges are not its alone. In the 28-nation European Union, 25.9 million people remain jobless, out of a potential labor force of about 244 million. Data released last week showed no change in the euro zone’s 11.9 percent unemployment rate in February. Spain’s jobless figure was 25.6 percent, and Italy’s was 13 percent, a new high.
Now, in a cascade of recent reports, the European Commission, research institutes and economists are warning that rising long-term joblessness and declining incomes are straining government safety nets and swelling the ranks of people excluded from the labor market and mainstream society.
Consider the continent’s second largest economy. Investors Business Daily editorialized: “Since the advent of Europe’s monetary union in 199, France’s real per-capita GDP growth has averaged just 0.57% a year. That compares with the rest of Europe, which grew by over 1$ a year. And ‘the rest of Europe’ includes such fiscal basket cases as Greece, Italy, Spain, Portugal and Ireland – all of which are technically bankrupt.”
Now, there are new worries. Gideon Rachman wrote in The Financial Times: “A further struggle looms over whether Mr [Mario] Draghi and the ECB can counter the threat of deflation with a European version of quantitative easing. Mr Draghi seems to be edging towards such a policy. But he too faces deep scepticism in German, whose finance minister Wolfgang Schäuble, bluntly insists that Europe does not have a deflation problem.
The dilemma faced by Europe was outside in an article by the Financial Times’ Martin Sandbu: “A former adviser to European Commission president José Manuel Barroso has accused the body of embracing Germany’s austerity-focused response to the eurozone debt crisis in a ‘strategic’ bid to enhance its own power.” Philippe Legrain declared: “Rather than being sidelined, [the commission] chose to strategically align itself with Germany” than thus split Europe politically as well as economically.
Of course, bashing Germany-inspired austerity is nothing new. But when the BBC polled citizens of 22 countries it found that Germany is respected. – rated “mostly positive” by almost three out of five respondents – far more than any other country surveyed.
Bruce Stokes of Pew Global Attitudes Project reported: “Over the last two generations one goal of the European project has been to narrow the differences between Germany and the rest of Europe. But recent economic difficulties have only amplified those dissimilarities. The contrast between German sentiment today and that of other Europeans could not be more stark...may only complicate Europe’s efforts to deal with its current troubles because Germans have different concerns, different priorities and favor different solutions.”
“Here’s the short story: The U.S. has exited from financial crisis: Asia and Europe have not,” wrote Rana Foroohar in TIME at the beginning of this year. “China, the second largest economy in the world, is pretty much where the U.S. was five years ago – deeply in debt...Japan, where the government debt is over 200% of GDP, continues to struggle too. Short of some serious austerity, Japan will probably have to live with another lost decade or two of negligible growth. As for Europe, while central bankers have saved the euro (at least for now), deflation is making the region’s already bad debt troubles worse.”
So far, so true. The IMF has issued its latest World Economic Outlook (WEO) and it is slight less optimistic than the last one. “The IMF forecasts global growth to average 3.6 percent in 2014 -- up from 3 percent in 2013?and to rise to 3.9 percent in 2015.
The strengthening of the recovery from the Great Recession in the advanced economies is a welcome development, according to IMF staff. But the latest WEO also emphasizes that growth remains subpar and uneven across the globe.
“The recovery which was starting to take hold in October is becoming not only stronger, but also broader,” said Olivier Blanchard, Economic Counsellor and head of the IMF’s Research Department. “Although we are far short of a full recovery, the normalization of monetary policy—both conventional and unconventional—is now on the agenda.”
Blanchard cautioned, however, that while “acute risks have decreased, risks have not disappeared”.
In this setting, the global economy is still fragile despite improved prospects, and important risks—both old and new—remain. Risks identified previously include finishing the financial sector reform agenda, high debt levels in many countries, stubbornly high unemployment, and concerns about emerging markets.
The Financial Times’ Chris Giles and Robin Harding wrote: “Although the IMF has warned about the potential dangers of the exit from US quantitative easing for at least a year, its new concern is that prolonged low interest rates will make any exit even more difficult.
“The key message is that strong policy actions are needed to definitely turn the corner from the great financial crisis and engineer a successful shift from ‘liquidity-drive’ to ‘growth-driven markets’, said José Viñals, director of the IMF’s monetary and capital markets department. Saying the timing of exit was ‘critical’, the IMF warned that there might be no easy way to normalise policy without significant financial turmoil.
The IMF is particularly pessimistic about a number of the BRICS – lowering its forecast for Brazil and South Africa by half a percent in 2014 and Russia by 0.6 percent. As the IMG phrased it: “Downside risks continue to dominate the global growth outlook.”
Downside risks are so depressing.
Things have tense on the streets of Venezuela, but as the country devalues its currency, it has increase efforts to change its image abroad as the anniversary of Nicolas Maduro’s “election” as president approaches. So now, the Maduro government has agreed to political talks with the opposition – seemingly as part of an effort to recapture the political space lost by its economic ineptitude.
The talks – to be overseen by three South American foreign ministers and a Vatican representative — are being held with a coalition known as Democratic Unity with former presidential candidate Henrique Capriles participating. Leaders of the Popular Will Party – several of whom have been imprisoned – have said they will not participate until political prisoners are freed.
“We want to make it clear, we are not supporting these talks at all," one student leader told Fox Latino, "Our protest is with the people on the streets and we want to make it clear: the protests didn't come from the group of opposition or the government. There is no representative of the students. Our talks are with the people on the streets." Opposition in the country continues to be stamped out. Dissident lawmaker Maria Corina Machado from entering the legislature recently.
At the same time, President Nicolas Maduro did his best impression of a reasonable democratic leader in a New York-Times op-ed:
The article by the charm-challenged leader concluded: “Now is a time for dialogue and diplomacy. Within Venezuela, we have extended a hand to the opposition. And we have accepted the Union of South American Nations’ recommendations to engage in mediated talks with the opposition. My government has also reached out to President Obama, expressing our desire to again exchange ambassadors. We hope his administration will respond in kind.”
Meanwhile, the Venezuelan economy stumbles through exchange rate chaos and political mischief. The New York Times’ William Neuman reported: “The new exchange rate mechanism is intended to reduce the black market price of dollars, which had soared in recent months.
Yet the impact of the measure, which is similar to a system that was shut down in 2010, depends on how much money the government allows to change hands in the new market and how freely it allows the market to operate. Alejandro Grisanti, an economist for Barclays, said the change “makes the exchange rate system more flexible,” adding, “And in that sense it’s very positive for Venezuela.
Charm or no charm, Venezuela’s economy is increasingly fractured – with the government looking for demons rather than solutions. One of the government’s socialists backers complained: ‘this will be no more than a free market for the powerful; the new coven of businessmen.”
BY KATHLEEN M. PACKARD: