Why the US will fare better than Europe in economic recovery
In an interview, the former president of Chile, Ricardo Lagos, says that today’s global financial crisis is mainly a political failure rather than an economic one. The US will probably do much better in its financial recovery because its central bank, unlike Europe’s, has the powers it needs.
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Scott Malcomson: Let’s start with the G20 and its changing role. How do you see that?
Ricardo Lagos: I think the G20 represented a recognition of political necessity in the economic sphere. The emergence of the Group of 20 as a result of the international crisis was based in the recognition of the G8 that they didn’t have a sufficient number of countries to face a crisis of this magnitude. It was perhaps suggestive that it was President George W. Bush who recognized the necessity of bringing in Third World countries and emerging markets.
But in order to be effective, the G20 needs to be united in its pursuit of policies and to develop a united opinion. This it has proved unable to do.
Today, I think the G20 can form an informal nucleus for developing policies that it could then bring to other venues, such as the UN General Assembly or other councils that are relevant to whatever issue the G20 is concerned with. For example, the G20 could channel economic policies to the Bretton Woods institutions. I do think the relationship between the G20 and the International Monetary Fund helps explain why certain recent statements by IMF officials have suggested that the Fund is relaxing a little its exclusive focus on austerity in response to the crisis. But in any case, the G20, in my opinion, is an advance in that it keeps major powers asserting their power through a scheme of rules.
Malcomson: The IMF is certainly relaxing its approach, but why? Political reasons, ideological reasons, or the pressures of the moment?
Lagos: I think it is a mix. In the first place, the [global financial] crisis, in order to be resolved, has led nations to turn to Keynesian policies. Secondly, I think it is very important that the IMF has realized that when it tried to get out of the crisis purely on the basis of austerity policies, it was a profound error. They saw that giving stimulus packages was also an important element.
Third, I think the IMF saw the limits of Europe when confronted with the crisis, in that the European Central Bank did not have the capacities that the US Federal Reserve Bank had. The Fed could, in effect, print money. The ECB could not. The Fed responded with every means it had. The ECB did not have as many means. The ECB is now paying the price for financial arrangements that created the bank and a currency, but did not enable the harmonization of fiscal policies. It’s impossible to have a central bank run on a sound basis when you have 16 distinct national fiscal policies.
Malcomson: One sees in Europe signs of re-nationalization, now that faith in a kind of depoliticized, rational European economic space has been undermined, for some, by events. It is interesting that national politics – democratic for the moment, anyway – is reasserting itself.
Lagos: Yes, but I think the main trend is the opposite: that national fiscal policies are giving way to supranational fiscal governance, because they have to. It is not possible to have one monetary policy and several fiscal policies. Therefore you need to go forward and give some powers to the central bank with regard to fiscal policies. So the question is not a renationalization of policies but the other way around.
In addition, the European Central Bank must be able to serve as a lender of last resort. The local banks who get in trouble should not be looking to their respective governments for help. This is a task for the central bank. If you want to keep the euro, that means more and not less integration in terms of fiscal policies.
Let’s be clear. The problems of Spain today do not have to do with economic failure; they have to do with banks that the government felt were too big to fail and therefore bailed out with taxpayer money. The banks might be made stronger, but the resulting austerity policies are being borne by all of the Spanish people. And this is, to an extent, what is happening across Europe. Many of the macro numbers of Spain were much better than those of Germany.
Malcomson: At the same time, there has really been no surge in popular support in Europe for the European project as a whole. Greater integration or centralization is not really seen, at any popular level, as the solution. Indeed, there have been nationalist resurgences in many places, while, simultaneously, individual European states have not just bailed out their own banks but turned to them to support their own national bond markets. There was a resurgence of the dependency of the state on its citizens in its moment of crisis.
Lagos: I think that we must look back at the G20 of George Bush, the G20 of London in 2009, when it took all of 30 minutes for the leaders to decide to increase the resources of the IMF from $250 billion to $750 billion. Well, for how many years had the poorer countries been urging an increase in IMF resources, only to be told it was impossible? What had changed?
The fact is, in April of 2009 everybody agreed that some sort of expansion was going to be necessary to meet the economic crisis and to prevent a depression like that of the 1930s. Unfortunately, later, in Pittsburgh, when [President] Obama kept saying that greater stimulus was needed, many others were thinking, with [German Chancellor] Angela Merkel, that the danger was inflation, and therefore that the right policy was austerity. And that, I think, was a tremendous mistake.
The crisis is mainly a political failure rather than an economic one, rather as it was in the 1930s. If Europe continues to pursue austerity, it will take a decade to recover. The United States, by contrast, will probably do much better, not least because its central bank, unlike Europe’s, has the powers it needs.
Malcomson: Let me ask you about that from the perspective of a smaller state. The Federal Reserve’s stimulus, via quantitative easing, is in one sense using the power of a dominant, reserve currency to the disadvantage of other economies. Chile has for many years embraced an open international system and thrived as a result. But it is also perhaps vulnerable, since it has no power whatsoever over Fed policies, even as it is affected by them. How does quantitative easing look from the perspective of Chile?
Lagos: I remember when I was, in 1971, in the United Nations complaining that the backing of the dollar by the gold standard was abandoned by [President] Nixon on August 15 of that year. And the question was: What is going to be the backing of the dollar? And the answer was: the US economy. So the United States has the power to do quantitative easing, because the rest of the world is willing to accept the American currency. This is, of course, not the case with the euro, and even less so with currencies from small countries like Chile.
But I think that the main factor in the case of Brazil, for example, or of Chile, whose currency has appreciated greatly, is that their main exports, notably to China – soya beans in Brazil’s case, copper in Chile’s – have experienced such high demand.
As far as openness is concerned, it is true that Chile has a very open economy, and has been growing in recent years at about 5 percent. But it is also important to remember that 95 percent of Chile’s international trade is done within the structure of free-trade agreements. So we do not see a contradiction between open markets and governance. On the contrary, our experience has led us to see them as complementary, with global governance being necessary to the continuance and strengthening of freedom in trade, financing, and other areas.
How is it possible to have globalization without rules? To put it mildly, if we have a globalization without rules that means we will have a globalization whose rules will be set merely by the most powerful.
This alone makes small countries highly motivated to advance global governance. That is even more true because so many of the biggest challenges we face – drug trafficking, migration, and above all, climate change – are far beyond the capacity of any small nation to solve on its own.
For now I am hopeful that Mr. Obama, having been safely re-elected, and the new leadership in China, will both seize the moment. I think Obama is inclined toward global problem-solving anyway, and I think the new leadership in China is highly motivated, including for internal, domestic reasons, to find ways of addressing climate change in particular.
© 2013 Global Viewpoint Network/Berggruen Institute. Hosted online by The Christian Science Monitor.