The UK and the Eurozone in the shifting global economy
- By Danny Quah
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China.org.cn, December 19, 2011
The problems faced by the UK, or more broadly, by member states across the entire EU, while different in concentration, are no different in character from those in the 2008 Global Financial Crisis: Large entities owe large amounts of debt and are likely unable to pay it all back. Previously, the entities were financial institutions; now they are sovereign states. Quick fixes that seek to get around repaying this debt will undermine institutions of trust and responsibility, those same institutions the West tells emerging economies they must build if they too want to become developed economies.
When the first round of Quantitative Easing (QE1) happened in the US, output there rose — and to a smaller extent elsewhere in the world as well. With QE2, IMF estimates show the impact multipliers everywhere had diminished sharply.
Now? There are those who hope a rescue will come when the ECB unleashes its own QE on Eurozone sovereign debt. Or some optimistically-ingenious scheme involving different-coloured centrally issued Eurobonds, or where the discrimination occurs across member states using some other indicator might work. With luck perhaps. Longer term, some observers look to a fuller-fledged fiscal union, with Germany transferring likely more than 5% of its GDP to the Eurozone's lesser-performing periphery member states (link: Gavyn Davies, FT, 06 November 2011 ).
But the connection between this re-organization and member states' fiscal positions cannot be ignored. While all attention now focuses on deficit/debt figures compared to those originally given in the Maastricht Treaty, pretty much totally neglected is the nearly-contemporaneous Copenhagen criteria for EU accession. That list includes — after requiring member states be democracies that obey the rule of law, respect human rights, and protect minorities — the statement that candidate member states need to be market economies able to deal with "competitive pressure and market forces within the Union".
I'm sorry but I don't think receiving a perpetual 5% German GDP transfer strong evidence for that capability. (And this is just for EU accession, not even for Eurozone membership.)
Monetary or other financial rescues are short-term; we need them the same way we need to kickstart an engine. But if that engine is worn out or is leaking fuel or in need of a complete overhaul, I don't see how we are going to get very far with that machine. We can't mistake a short-term boom fueled by exigent government actions for sustained long-term growth. Again, isn't this what the West tells emerging economies?
How would I propose to change matters? My suggestions at the event were general and therefore impractical. But here they are again:
1. Reboot the UK economy: Take the pain and turn around to engage fully with the emerging economies; do business with them as economic partner — no more, no less. The emerging economies are now the world's engine of growth: Deal with it.
2. Unleash our universities and other thoughtful, creative industries. This is NOT to raise government spending, but just to free up extant restrictions on their operations. UK higher education is hugely in demand by the emerging economies. If there's anything that's going to help re-balance the global economy, this is it.
3. Throw out long-standing aesthetics and principles – they're also called prejudices. Become enamoured of what works — whether it's guided capitalism under a bit of state control or anything else we previously thought completely nuts (i.e., outside the Washington Consensus). Celebrate the virtues of working hard, raising productivity, saving for the future — not revile them as many do today for Germany or used to do most obviously recently only for China (and yet might come back to doing so again soon).
Danny Quah is Professor of Economics at the London School of Economics and Political Science; he is also Co-Director of LSE Global Governance, and Senior Fellow at LSE IDEAS. He currently serves on Malaysia's National Economic Advisory Council. Prof Quah was born in Malaysia and is now a British citizen. He holds a blackbelt in taekwon-do.
