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Friday, November 22, 2002

Chretien Rejects Aide Resignation After "moron" Comment

I have, as they say in official circles, no comment to make on this:

Canadian Prime Minister Jean Chretien said on Friday he had rejected an offer by his chief spokeswoman to resign after she was quoted as calling U.S. President George W. Bush a moron. The reported remarks by Francoise Ducros, made during a NATO summit in Prague, made headlines in Canada and the United States and prompted demands from Canadian opposition politicians that she be fired. Chretien told journalists that no one in the U.S. delegation had made reference to the comments during several meetings this week at the summit and he joked that Ducros uses the word "moron" regularly.
Source: Reuters News

Subsequently Chretien is quoted as saying that Bush was "not a moron at all, he's a friend". Again, no comment.

Tuesday, November 19, 2002

Will the China impacts Overwhelm Traditional Stabilization Policies of Other Major Economies in the World?

A good question. And who's asking it? Why Stephen Roach of course. He's fresh back for Morgan Stanley's annual global investment conference held this past week in Nassau. Among other observations about the international economic environment, his post yesterday contained the following insightful comment on China:

China finally made it to center stage this year. I have been pushing the bull case for China consistently at this conference over the last three years. The response has been lukewarm, at best – an interesting story but one filled with innumerable short-term risks (i.e., banks, rising unemployment, and still too many unprofitable companies) and an all-too-distant long-term payoff. This year, China was ubiquitous – present in virtually all aspects of our discussions. China’s deflationary influence was stressed by many as a powerful depressant on profit margins of western industry. China was also perceived to be unstoppable in any market-share battles in Asia or the broader global arena. In our session entitled "Search for Growth," no one wanted to consider Europe, Japan, or anywhere else in the world as a potential replacement for the stalled American growth engine. China was thought to be the only viable candidate.

China’s ascendancy at this year’s conference was indicative of the ultimate paradox that came out of the debate – the notion that the Authorities actually have the answer in an increasingly deflationary world. Not only is China a growing source of macro tension in the world from the standpoint of pricing and market share, but its impacts tend to overwhelm the traditional stabilization policies of other major economies in the world.
Source: Morgan Stanley Global Economic Forum

New OECD Study on Japan

The Organisation for Economic Cooperation and Development (OECD) has published a new economic survey for Japan. The OECD urges the Bank of Japan to ease monetary policy significantly, arguing that its existing actions have not worked and that the time has come to adopt a 'more adventurous' strategy. In the report the OECD argues that the central bank of the world's second largest economy should "move further into unchartered territory" if it is to stand any chance of bringing an end to deflation.It said the bank should raise the target range for current accounts of the banking system by considering purchasing more government bonds, expanding the range of assets it is prepared to acquire, and possibly setting an inflation target. These are measures the bank has itself described as "unorthodox", but with the reform of Japan's banking sector gathering pace consideration of such policy options is, it seems, becoming more likely.

Regarding government debt the OECD projects that a primary surplus of 1.75 per cent of GDP is likely to be necessary to stabilise the debt/GDP ratio at 180 per cent by 2010. With a primary deficit currently around 6.5 per cent of GDP, significant consolidation is therefore required. The OECD projects the primary deficit being reduced to 2.2 per cent of GDP by 2006. This of course, is a 'best case' scenario. I don't even want to contemplate what the 'worst case' one might look like.

The Japanese economy remains in a serious deflationary situation even while experiencing a cyclical recovery phase in mid 2002 underpinned by inventory correction and a sharp pick-up in exports. But the recovery is too narrowly based to represent a break with the pattern of generally low growth experienced through the 1990s. The still high capital/output ratio is likely to limit any pick-up in investment to a short term adjustment, while continuing weakness in the labour market is expected to restrain consumption growth to around one per cent per annum. More recently, a combination of factors – particularly low share prices in Japan and elsewhere, a marked appreciation of the yen and a moderating export expansion – has dampened growth prospects going into 2003.

All in all, the economy may grow by only around 1 per cent per annum to the end of 2004 with deflation continuing. But the balance of risks is now on the downside given signs of slower growth in the world economy and the possibility of a further deterioration in financial conditions, which might lead to a worsening of deflation. Thus Japan continues to be faced with the daunting challenge of radically and quickly improving the functioning of itseconomic system and halting deflation.

What needs to be done to control
public debt?

Beyond FY 2003, the central issue is whether or not Japan succeeds in placing its public finances on a credible consolidation path which would minimise the danger of a sharp increase in interest rates and increased household savings via a Ricardian effect. The OECD projects that, on a general government basis, a primary surplus of 1¾ per cent of GDP is likely to be necessary to stabilise the debt/GDP ratio at some 180 per cent by 2010. With the primary deficit currently around 6½ per cent of GDP, significant consolidation is therefore required. In this light, the extent of fiscal consolidation envisaged in the government’s Medium-term Economic and Fiscal Perspective, agreed in January, is far from sufficient. The Perspective projects the primary deficit of the central and local governments to be reduced to 2.2 per cent of GDP by FY 2006, the end of their projection period, with a view to eliminating it as soon as possible after FY 2010. However, this involves an optimistic assumption about an end to deflation, which is unlikely to be realised in the near future. The Perspective is a small first step towards defining a medium-term fiscal policy framework. It needs to be made both more ambitious in its objectives and more concrete, and make use of shorter run real spending targets to improve credibility.

It should also spell out specific policy requirements that should guide current and future policy decisions. It needs to consider how the required revenues can be secured and spending cuts achieved against the mounting pressure for expenditure to rise, not least due to population ageing. In this respect, the heavy dependence of prefectural and local governments on the central government via public works and tax transfers, which has been a marked feature of public governance, also needs to be addressed. The government’s sense that deep changes are required in order to develop regional dynamism is appropriate. Reforms in this area will take time and should be linked with fundamental tax and expenditure reform.

Should Britain's Euro Decision Be A Political One?

Well Elisabeth Guigou, former minister in the Jospin government, and deputy in the current French parliament thinks it should. She argues her case in today's Financial Times:

Times are changing. Much like any other old couple, the French and the Germans seem to have understood that divorce would be too difficult to cope with. The prospect of enlargement and the considerable achievements of the convention on institutional reform are providing the EU with fresh impetus. In such a context, can Britain reasonably refuse to join the eurozone?

Of course, economic considerations must be taken into account. Britain needs to judge whether joining the single currency would benefit its economy and financial status, and the welfare of its people. As I read the various British contributions to the debate, I am surprised that they are unable to provide a clear answer to the most crucial question of all: where does the UK's economic interest lie?................Since economists do not agree, and because the opinion of business circles fluctuates along with the economic situation in the eurozone, it would seem that economic arguments in themselves are inconclusive.

In my view, political arguments should weigh heavily when the time comes for a final decision. Britain's answer to the euro question will be seen as the most important test of whether the country believes its destiny lies within the EU. The choice belongs to the British people. But they should be aware that an eventual refusal to join would considerably and lastingly diminish British influence in Europe. On the other hand, were the UK to become part of the eurozone its authority would be strengthened, both in the EU and in the wider world.
Source: Financial Times

Guigou's argument seems to be that that since the economic arguments appear to be inconclusive, the better decision strategy would be a political one. This really reveals quite clearly what the whole problem is with how we think about the Euro, and how decisions have been arrived at. The central idea is that political fiat can over-ride economic imperatives. But take a glance across the planet - to Japan, or another glance to the other side - to Argentina. Do we not have clear examples of how political over-rides on economic processes do not always end happily.

Gordon Brown is about to present his famed five economic assessments - sustainable convergence between Britain and the eurozone; sufficient flexibility within the eurozone; the effect on investment; the impact on financial services; and the effect on employment. Before deciding whether or not the economic arguments might be compelling would it not be interesting to await the results of this assessment. Does Britain not have the opportunity to wait and see whether this 'experiment' in political economics works before jumping in feet first. Should some consideration not be given to the current conflict between the ECB and the Commission (conveniently enough not mentioned by Guigou). Instead she simply asserts that "on the cost side, the loss of independence in setting interest rates appears to be the most important issue. Can one size fit all?" Indeed the interest rate situation seems to be a telling situtaion at present, with Duisenberg unable to take a good decision because there is no 'good' decision available (see my blog here). As for sustainable convergence between the UK and the Eurozone, the Eurozone itself appears to be experiencing divergence big-time (to steal an expression) right now, with Germany slumping towards deflation while Spain spirals its inflation upwards. I wish someone would explain to me how this can work.

Now interest rates may be an important issue, but they are surely not the only one. How about the affect of the inability to control the currency value on the balance of payments, or the homogeneity of the economic infrastructure and labour force? Unfortunately, instead of investigating whether or not the sum total of the associated economic problems means that the benefits of Euro membership are now as clear as they appeared to be, she simply informs us: that "an assessment-based approach underestimates the dynamic character of European economic integration." I am afraid Elizabeth that you do not convince.