Getting back on track without derailing
“To solve the Eurozone crisis, we need more than what is being done right now”, says Andreas Höfert, Global Chief Economist at UBS Wealth Management, during a press conference at UBS Luxembourg. He defined the three crises that need to be resolved in order to position the euro as a widely accepted currency once again.
According to Andreas Höfert of UBS, there is the sovereign debt crisis, the banking crisis and the crisis of competitiveness. To solve all three you need to build now a European institution for an optimal currency area, which Mr. Höfert laments, the European Monetary Union is lacking right now. To solve the debt crisis, you would need a certain form of fiscal consolidation, which would lead to a loss of sovereignty of countries. To solve the banking crisis, a banking union is needed, Mr Höfert argues.
Finally, to solve the crisis of competitiveness, you need to level the playing field of many countries in the Eurozone, because only Germany is competitive right now. “That means labour market reforms, social security systems reforms and other reforms, not forgetting that countries that have to do this are already on an austerity programme. This will take a lot of time and cannot be achieved in any number of European summits, each claiming to be the very last chance; it will probably take at least a decade to build these sorts of things”.
At the same time, markets are very impatient and would like these crises to be solved as quickly as possible, but this is not feasible, Andreas Höfert adds. This is where the European Central Bank intervenes, not to resolve the crisis, but by buying politicians time. This is not a criticism aimed at politicians, but an acknowledgment of the democratic system we live in. “Since the beginning of the financial crisis in 2008, 16 governments have been ousted during elections”, the UBS chief economist reminds us of the democratic process we live in.
He has a number of ways to get back on the path to growth, but has also named risks that could derail the whole recovery process. One of them is the Greece euro exit, which will likely happen in the next 12-24 months, the UBS expert speculates. “This is easier said than done. If Greece were to leave now, it would create a precedent leading to some geographical contagion and we would probably see Portugal and Spain leave, creating a domino effect. Before proceeding, we need to make sure that Greece can leave without causing too much damage, and you have to build a banking union”.
A few months ago, we heard German voices calling for Greece to leave the Eurozone, Andreas Höfert underlined: “Now, you don’t hear that opinion anymore from the government. There are general elections in Germany in September 2013; nobody wants to see Greece leave before that date”. Germany is causing trouble too, he thinks, because even though it is the one country that can lead the Eurozone back to the path of recovery, it still hasn’t made up its mind about what it wants.
“It wants the euro, but doesn’t want to pay, and this is not feasible. Leaving is not an option, because it is as expensive as staying. It is not even about exports getting hit because of the currency appreciation but because of many institutions that would have balance sheet problems”.
Overall, Europe is in a recession. Some countries have bounced back, but still have negative growth. The UBS experts predict zero growth in 2012 and close to zero in 2013, with a likely bounce back in the second half of 2013.
The US is in a slightly better position; it is seeing growth of about 2% this year. The general assumption UBS has had since 2008 is that the US is not capable of producing much more than 2% of growth per year. This is because the country is in the middle of a deleveraging phase and this is weighing down on much of its economic growth. Another issue is the debt, which in the US is more than 100% of the GDP. “Picture the US is in the Eurozone; it would be one of the countries that would need help at this stage, just like Greece or Spain”.
Talking about the monetary policy measures by the Federal Reserve, he stresses that these programmes won’t help the labour market, because printing money doesn’t reduce unemployment. Drowning the world in liquidity will spawn a monster called inflation that we will only see at the end of this decade.
“It will be a nasty inflation, not the one we are used to, namely, inflation due to economic growth. We mustn’t forget what we had in the seventies high inflation, low growth and high unemployment all happening simultaneously. Inflation is not coming from an overheating of the economy, but because there is a lack of confidence. Right now, money is backed by nothing else than by the confidence we have in our central bankers and that they and other authorities will do the right thing”.
Regarding China, UBS has lowered its forecast for 2012 and 2013 to 7,5% and 7,8% from 8% and 8,3% respectively. The continuing slowdown of China is a concern, but not really worrying Mr Höfert. “I am optimistic because the 7% growth has a different effect than the double-digit growth the years before. What is more, the Chinese authorities didn’t like the way the rate of the economy was growing. They had a lot of concerns about the housing market in China as well as inflation and that they wanted to slow down the economy”.
One challenge for the new political generation in power is the need reorient the economy more towards domestic demand in order to have a more balanced economy. Right now, China can be defined as a middle-income country. Now the challenge, a quite daunting one, is to get the country to the next level.
“China must be careful not to be caught in this so-called middle-income trap. Brazil is the perfect example of this: it has been “the country of the future” since the 1960s. It is about pushing for the extra mile. To do this, you need an educated population, meaning citizens that are thinking about the political system they live in”. There is, according to Andreas Höfert, only one way to solve this conundrum: the Chinese government needs to find a way to open itself while at the same time making sure that the social stability is not disrupted. CW