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THE NEXT FINANCIAL ORDER
Disaster Can Wait
Barry Eichengreen
2011-12-09
Disaster Can Wait
SHANGHAI Nowadays there is no shortage of pundits, economic
or
otherwise, warning of impending disaster. If right, they are
hailed asseers; if wrong, chances are that no one will remember. So
heres a
forecast: there will be no shortage of predictions that 2012 is
shaping up
as a disastrous year.
My view is different: 2012 will not be a year of crisis, but nor
will it bring
an end to our current economic troubles. Rather, it will be a
year of
muddling through.
Many people think that 2012 will be the make-or-break year for
Europe
either a quantum leap in European integration, with the creation
of a fiscalunion and the issuance of Eurobonds, or the eurozones
disintegration,
igniting the mother of all financial crises.
In fact, neither scenario is plausible. The collapse of the
eurozone would, of course, be aneconomic and financial calamity.
But that is precisely why the European Central Bank will
overcome its reluctance and intervene in the Italian and Spanish
bond markets, and why theItalian and Spanish governments will, in
the end, use that breathing space to complete the
reforms that the ECB requires as a quid pro quo.
To be sure, Europe will not be spared the pain of a recession. A
botched bank-recapitalization planand the cloud of uncertainty
hanging over the euro mean that recession is already baked in.
Moreover, the pro-growth reforms needed in countries like Italy
will almost certainly make things
worse before they make them better. The initial effect of
reducing hiring and firing costs, forexample, will be layoffs of
redundant workers. But investors look ahead, so reforms that
promise
an eventual return to growth should reassure them.
While the eurozone is unlikely to collapse in 2012, there will
be no definitive answer to thequestion of whether the euro will
survive, because there will be no quantum leap in European
integration. Treaty revisions take time to draft and more time
to ratify. Efforts to strengthenEuropes fiscal rules, for example,
will take the form of bilateral agreements between
governments, rather than changes in the European Unions Lisbon
Treaty.
It is a sad state of affairs when a recession qualifies as
muddling through. But such is theEuropean condition.
Consider next the United States. While recent data suggest that
the economy is doing better all
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signs are that GDP will have expanded at a 3% annual rate in the
fourth quarter of 2011 it is
important not get carried away. Fiscal support for the expansion
will continue to be withdrawn.
And, while the housing market shows some signs of stabilizing,
prices will remain weighed downby the large shadow inventory of
homes in foreclosure and held by banks.
These considerations suggest that the acceleration of US growth
that began in the third quarter of2011 is unlikely to be sustained.
At the same time, if growth slows significantly, the US Federal
Reserve will undoubtedly respond with another round of
quantitative easing QE3 by another
name. Thus, while growth next year is likely to fall well short
of 3%, the US should be able toavoid a double-dip recession.
Finally, China should grow by 7.5-8% in 2012. This is muddling
through, Chinese style
considerably slower growth than the double-digit rates of the
past, but not the hard landing thatpurveyors of doom and gloom warn
is inevitable.
I am more pessimistic than institutions like the World Bank and
International Monetary Fund,
which anticipate Chinese growth in 2012 of 8.5-9% forecasts that
do not take into account the
sharp cooling of Chinas housing market. Although weakening
housing demand has not yet shown
up in lower prices, the volume of transactions has fallen off
dramatically. And where volumes lead,
prices eventually follow.
Fortunately, China is still enough of a planned economy that
officials can mobilize policies tocushion the impact. If
construction plummets, for example, the authorities can reduce
reserve
requirements, as they recently did, thereby encouraging banks to
lend to other sectors. And, if
the European and US economies avoid the worst, Chinese exports
will hold up.
Thus, if all of the global economys largest pieces fall into
place, there is no reason why 2012
should be a disaster. But muddling through cannot continue
forever. Europe needs to draw a line
under its crisis and figure out how to grow. The US needs to
overcome its political polarization and
policy gridlock. And China needs to rebalance its economy
shifting from construction and
exports to household consumption as the main engine of growth
while it still has time.
Of course, if none of this happens or if not enough of it does
2013 could turn out to be the
annus horribilis of the perma-bears dreams.
Barry Eichengreen is Professor of Economics and Political
Science at the University of
California, Berkeley. His most recent book is
ExorbitantPrivilege: The Rise and Fall ofthe Dollar.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
