So, how do we stop the rot?
As policymakers on both sides of the Atlantic grapple with a crisis fed by economic woes and sovereign debt fears some of the world's leading economic and business thinkers offer analyses and solutions
Saturday 06 August 2011
Global markets are stressed by three disturbing issues: a synchronized weakening of economic growth around the world, limited policy responsiveness, and the widening of the European debt crisis.
Policymakers will look to react. They will only succeed if they go after the root causes of the current malaise. They must pursue two sets of co-ordinated measures: first, safely de-lever over-indebted balance sheets; second, promote growth by lifting structural impediments.
This is a tall order. Policymakers in Europe and the US have consistently underwhelmed. Moreover, as highlighted by the continued bickering in Europe, they have also failed in delivering effective policy coordination.
Hopefully, this week's debacle will be a wake-up call.
Nobel Prize-winning economist, Columbia
If we don't cut deficits, markets react negatively, and if we do cut deficits, markets react negatively because they worry about the ability to pay debt interest from an economy that needs stimulus. There are ways round this, but there is not the political will. The US and the UK are mired in a false ideology. What we should be doing is spending more money on investment, and changing the tax structure. We should be taxing more on the top and less on the bottom. We need to change spending too, reducing war expenditure and increasing education spending at home that could stimulate the economy.
Meanwhile, no one knows how much we in the US are exposed to the risk of European sovereign default through credit default swaps because banks resisted so strongly new rules on transparency.
Chairman, Goldman Sachs Asset Management
To sort this one out, Europeanpolicymakers will need to cut their holidays short, that is for sure. We need to hope the leaders of the eurozone do something quickly. It is only a fortnight since they last put together a rescue package but like all the others since May 2010, that one falls short.
Brussels, Frankfurt and Berlin, especially the latter two need to get ahead of the markets. I believe that the markets won't regain any faith in EMU until they believe confidently that it is moving to a greater fiscal union and with it, a true euro denominate bond.
Until then, the ECB has to be much more aggressively supportive rather than sticking to its narrow mandate on inflation. Other- wise, we are in for a grim autumn .
Chairman, Better Capital
You can't nip this in the bud. It is pretty simple: countries are spending beyond their means, stacking up debt and the markets are afraid. They fear the debt won't be repaid or will be inflated away. At the moment this is like trying to defend a sandcastle from the tide and will only stop when countries default or get their expenditure into line.
It will get to the UK shortly... our deficit is going up not down. I've been saying we have to cut for two years and take the pain right away. Only one country on earth has moved to cut its way out of the crap, and that's Estonia. Yet, the politicians in the West don't want to grasp the nettle because it is too painful.
There is no political appetite. You can cut hard now and take the pain or you can wait and take it much harder when the true meltdown happens in the months to come.
Chief executive, British Bankers Association
We currently have a mix of fact and panic. Some of those facts are right; the US economic recovery seems to have stalled, and the EU had several false starts over Greece before the parliaments went on holiday. It is not surprising we have got real turmoil. I hope common sense prevails over this weekend. The eurozone has to act. This means there have to be some strong statements on the strength of Italy as well as well as Spain. It has to act on the decision it came to as the markets aren't going to wait for the summer holidays to be over. The UK may well get some wash-across but this turmoil isn't caused by the UK.
While some of the market reaction has been excessive, there seems to be a fundamental repricing of the economic recovery of some countries such as the US .
There are two categories of action needed.
First, those governments with real economic issues need to deal with them. The eurozone needs to give confidence that its member governments will play their proper role in providingstability and liquidity to other governments. The process in the US has been less than perfect as an example, where as the UK comes across here in a positive way.
Second, confidence needs to be restored in world markets. Central banks need to work together to address the issue. We need to see governments coming together within the eurozone to move quickly and clearly. It's a big thing and it's not easy to do things quickly in democracies. At issue is the whole question of global economic confidence.
In the UK, ringfencing is the wrong reform at the wrong time. It could increase the risk for the UK bankingsystem and cost everyone a lot of money.
Sir Martin Sorrell
Chief executive, WPP Group
Solving this is all about leadership. The deal that has been struck in the US doesn't seem to deal with the fundamentals, rather it kicks the can down the street.
The situation in Europe has also been brought about by a lack of leadership. They have been unwilling and unable to make the really tough decisions.
The markets don't believe the solutions that have been tabled can deal with Italy and Spain.
There may be a double-dip recession and at the very least the recovery could be very slow. This needs political and institutional leadership. It is not currently affectingcompanies, but in an environment like this will they hire? No. Will consumers carry on spending? No. It becomes self-reinforcing. There is a disconnect. The markets are rarely wrong and they are feeling very nervous.
Chief economist, HSBC
The European Central Bank has to expand its balance sheet hugely to create two-way risk in Italian, Spanish and other government bonds. By doing so, the cost to speculators betting on the euro's break-up will rise significantly.
Longer term, the only realistic solution to deal with the eurozone crisis is to move towards a version of fiscal union. Announcing a timetable to allow countries to have their own debates about entering the fiscal union would be a useful first step in changing the political rules of the game.
Although monetary unions have failed, including most recently the collapse of the rouble area following the break-up of the Soviet Union, other monetary unions have flourished because they also have enjoyed fiscal and political union, too. The shining examples are the US and the UK. The alternative to a fiscal union could be the total collapse of the euro project.
Co-head of economics, Deutsche Bank
In the short term, there is no escaping an extension of the bond buying programme by the European Central Bank.
Down the road, some things are under the EU's control but some are not. One of those that is, is the promise to deliver on the recent commitments on the European Financial Stability Facility in September. On top of this, there is now probably a need for more progress on thefiscal union and to begin discussion on the principle of a Eurobond. The markets do not expect a Eurobond to beimplemented in the near future, bu preliminary discussions will be welcomed.
Not under their control is the global economy. The increased pressure on Italy came because in a softer economic environment the market looks at lower-growth countries. There is nothing the EU can do about that.
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