Archive for December, 2010
Op-ed in the Moscow Times
November 25, 2010
In my September 3, 2008, column titled “10 Reasons Why the Russian Economy Will Falter,” I saw no reason why economic growth would continue. At the time, most economic analysts argued that Russia was a safe haven and predicted growth of 7 percent to 8 percent in 2009. Instead, gross domestic product plummeted by 8 percent in 2009.
During the past two years, the mood in Russia has changed profoundly. Euphoria and complacency have been replaced with cynicism and pessimism. A broad conviction has spread that the country is condemned to a growth rate of, at most, 3 percent to 4 percent a year.
Jacob Funk Kirkegaard says talk of debt restructuring or “haircuts”” for creditors is inevitable but is also fanning the flames of contagion and discord in Europe.
Edited transcript, recorded November 30, 2010.
Steve Weisman: First Greece, then Ireland, then maybe Portugal and Spain. What next for the contagion in Europe? We’ve had Jacob Kirkegaard of the Peterson Institute here on these developments a number of times. Thanks for coming again today.
Jacob Kirkegaard: My pleasure.
Steve Weisman: Give us a snapshot of the state of play at the end of November and beginning of December.
Jacob Kirkegaard: First of all one thing that is clear, the thing that everybody feared so to speak, which is contagion to a systemically important eurozone country—whether it’s Spain or Italy doesn’t really matter—has already materialized. That really is a significant change of events in the last couple of days.
With policymakers failing to make progress on the critical issue of global imbalances, America has no alternative but to put China on notice. Privately but promptly, Washington has to inform Beijing it will label it as a currency manipulator, back legislation treating the manipulation as an export subsidy, and take it to the World Trade Organization (WTO) if it does not let the renminbi rise significantly.
The macroeconomic regime implanted in Brazil during the second administration of Fernando Henrique Cardoso, and largely maintained by his successor, is typical of those of the advanced countries. The anchor is provided by an inflation-targeting regime (with a target inflation rate somewhat greater than in most advanced countries, of 4.5 percent a year, with a band around it of +/–2 percent). The exchange rate floats. The float is often described as free, but given the extent of recent reserve accumulation it would not qualify as a free float as understood by most economists. Fiscal policy has actually been more ambitious under the Lula regime, resulting for a time in a primary surplus of at least 4.25 percent of GDP (subsequently reduced to allow for a higher rate of public investment, and also temporarily reduced further to help combat the crisis). Monetary policy has then been directed at achieving the inflation target given fiscal policy, which—given history—has implied maintaining high interest rates.
Despite the expanding European commitments of aid for Greece and Ireland, accompanied by increasingly detailed pledges to set up a permanent post-2013 resolution mechanism [pdf], fears of a dreaded sovereign debt contagion have tanked European sovereign debt markets throughout the region, particularly in Spain and Italy. Never has there been more talk of doom for the entire eurozone.