Friday, March 19, 2010

Say Goodnight to the Bad Guy! Germany, Greece, and the IMF

The Financial Times reports today, "Berlin shifts stance on IMF role in Greece."

So, one day Germany says it won't bail out Greece.
Next day, Greece says it’ll go to the International Monetary Fund (IMF).
So then, Germany says it doesn't want the IMF messing in the eurozone.
Next thing you know, Germany says the IMF-option is back on the table.

What's going on here?

Somebody's got to be the bad guy.

Somebody's got to provide liquidity to Greece, but also make sure that all this money doesn't simply go towards subsidizing the bad policies that got Greece into this mess in the first place.

Changing policies means imposing painful austerity on Greece. Eventually, this might entail raising interest rates, placing ceilings on public credit, cutting public expenditures, and raising taxes. The value of the euro might also slip... which is why the onus of having an outside actor - the IMF - is distasteful to Germany. Oh - and the bad guy's got to slap around Greece bad enough to scare Spain, Portugal, maybe even Italy, or it might have to play bad guy in those countries later...

So then who will be the bad guy? Who will crack the whip?

The Greek government will get plenty of blame ... they'd like to spread some of it around.

The German government has been getting blame from throughout Europe for austere monetary policy for generations.

How about bringing in the IMF so they can share some of the blame as things go from bad to worse, as they surely will?

Note that by bringing in an international organization with as obscure governance as the IMF - whose membership includes all the countries in the world, and few understand who's really in control... many just figure it must be the United States - governments can obfuscate the responsibility for painful policy choices.

The IMF may yet have to play Dark Knight in this Greek tragedy - making the tough choices.

Why should my US audience care?

Well, we've been running a structural deficit for so long, our national debt is rapidly approaching 100% of our over 14 trillion dollar gross domestic product. A really big chunk of this debt is owed to China.

Some day - perhaps some day soon - we will have to pay the piper. We'll be the country that is raising interest rates, cutting public expenditures, raising taxes. Our government will look to scapegoat someone. We'll look for a bad guy. Of course, the IMF is too small to bail us out. They don't even have one trillion dollars, much less ten. So, we'll have to be more creative in painting the picture of a bad guy. We'll have to come up with new obscure ideas, like "currency manipulator" or "protectionist" ... maybe we'll just resort to ol'fashioned US xenophobia. Yeah, we'll probably just blame the folks who lent us the money in the first place. China'll be our bad guy.

You need the bad guy,
so you can point your *** fingers...and say, "That's the bad guy."
So...what does that make you? Good? You're not good.
You just know how to to lie.
Me, I don't have that problem.
Me, I always tell the truth.
Even when I lie.
So say good night to the bad guy!
Come on.
The last time you gonna see a bad guy like this again, let me tell you.

With apologies to Oliver Stone, Brian De Palma, and Al Pacino.

For more on these themes, see:

(1) Scarface (1983)
(2) The Dark Knight (2008)
(3) The IMF and Economic Development (2003)

Wednesday, March 17, 2010

One stone, four birds... Greece, Germany and the European Union

Thomas Meaney (Columbia University) and Harris Mylonas (George Washington University) have an interesting take on the Greek tragedy in the European Community:

"What hasn't yet shattered the EU just might make it stronger."

This is particularly true for Germany. They argue that the German dithering over what to do about the financial crisis of Greece - and by extension, the Eurozone - was actually strategic. Allowing the crisis to come to a head - threatening to tear the European Union apart - actually benefits Germany in four ways:

(1) The crisis has caused the Euro to depreciate which will help German exports:
"Germany has been hamstrung by a weak dollar and even weaker Chinese yuan. The devaluation of the euro relative to the dollar in the last three months by more than 10% has helped German exports recover from a devastating 19% drop in 2009."

(2) The crisis may help Germany see one of their own nationals elected to head the European Central Bank:
"The candidacy of the longtime favorite, Italy's Mario Draghi, has been severely compromised by his close ties with Goldman Sachs and its role in helping the Greek government's attempt to conceal the full extent of its debt. Now Axel Weber, the current Bundesbank president, leads in the running, putting the Germans in a much better position to have one of their own head Europe's leading financial institution."

(3) The crisis - especially the fact that Europe allowed Greece to languish before agreeing to come to the rescue - has sharpened the German whip it's been cracking at other debtor countries like Spain and Portugal:
"Germany now stands on much firmer ground when it comes to haranguing debtor nations in the Eurozone to get their books in order."

(4) The crisis had increased support for the German stand against expanding the Eurozone:
"EU nations such as Estonia, Latvia, Lithuania and Denmark, which have not made it into the inner sanctum of the Eurozone, will now face a much longer wait."

So while Germany seemed to struggle on the world stage as the financial meltdown in Greece threatened to wreak havoc on the rest of the German-led Eurozone, Germany may actually stand to improve its position in Europe. And if what's good for Germany is good for the European Union, then this story may yet have a happy ending.

The piece by Meaney & Mylonas appeared March 15, 2010 in the Los Angeles Times.

Friday, March 12, 2010

Gotta catch 'em all!

Prime Minister Hatoyama announced today that the yen is too strong and said that the exchange rate should be left to the markets...

But, of course the value of the yen should be left to markets! That's the whole point of a floating exchange rate. So why the announcement and why is it a headline in the Financial Times?

Well, this is sort of like when a passive aggressive friend tells you, "I can't decide for you if you should come to my party, you must make the right decision for yourself." Oh, and now imagine that your friend adds, "I wouldn't hold it against you except in extreme circumstances..."

For, the FT article goes on to say that PM Hatoyama added that markets should determine the exchange rate, "except in cases where there were sudden moves in the market that did not reflect the fundamental value of the currency" [quoting FT, not PM Hatoyama].

Basically, the Prime Minister is throwing a little uncertainty out to markets about what the government might do. And considering that his party's sweeping electoral victory last year represented an historic shift in power in Japanese politics, there isn't much track record to judge.

Now, the announcement is unlikely to shatter markets - the FT reports that the yen only weakened slightly following the Prime Minister's comments. And the government will likely not take any real action to lower the value of the yen.

Still, the announcement itself is a li'l bit of an action. The government does not want to see the value of the yen appreciate. A weak yen would be good for the strong export-oriented sector in Japan. A dropping yen would do much more to help Toyota sales, for example, than any further appearances from Mr. Toyota himself. The weak yen would make Japanese automobiles, electronics, etc. cheaper for people abroad (e.g., Americans), and it would make imports more expensive for Japanese consumers.

Let's take a broader perspective: The financial crisis in 2008 weakens the dollar. The Chinese renmimbi is pegged mostly to the dollar, so its value drops. In relative terms, this makes the euro and the yen stronger... Now, with the Greek tragedy playing out, the value of the euro drops. So, investors (and speculators) are looking to see what currency will keep its value... And, by the way, if we all coordinate on buying the same currency, we'll have a self-fulfilling prophecy. The value of whichever currency we all coordinate on will rise accordingly.

So, Prime Minister Hatoyama's headline is really just a message: the buck does not stop here either!

Now, under the old days that led up to the Great Depression, governments had fixed exchange rates and played dirtier. They engaged in outright competitive devaluations, and this beggar-thy-neighbor approach caused things to spiral out of control. A weakened currency can boost an economy, a valueless currency not so much. With major currencies on floating exchange rates, movements are gradual, and the games that governments play are subtle. That's good for all of us.

Yet, if we don't trust the dollar to rise, and we don't trust the euro to rise, and we don't trust the yen to rise, and the currencies of the emerging markets are still a bit risky, where will we go? The Chinese and the IMF have been floating the idea of a new international reserve currency... but I'm not optimistic. Does anyone know the number of a gold-broker?

For more on the coordination around international reserve currencies see:
McNamara, Kathleen R. 2008. A rivalry in the making? The Euro and international monetary power. International Political Economy 15 (3):439-459.

And for a great intro to these topics, see:
Oatley, Thomas. 2010. International Political Economy (4th Edition) (Paperback). New York: Longman.

Monday, March 8, 2010

A More Multi-Polar Mundo

Two headlines today in the London Financial Times are indicative of a multi-polar world:

Beijing studies severing peg to US dollar

Eurozone eyes IMF-style fund

The first is about China moving away from fixing their currency to the dollar, and allowing it to appreciate. The article also discusses China's growing economic and political ties to Africa and an oil pipeline between China and Russia.

The second is about Europe developing a European Monetary Fund, in contrast to the International Monetary Fund (IMF), whose largest shareholder is the United States. This news comes as the Chiang Mai Initiative moves forward to form a similar monetary fund for Asia.

What does this news mean for the United States?

The bottom line is that moving forward in the 21st century will require a different leadership style than we've had in the past. We will still be the largest economy of any single country - by far - and we'll have the most powerful military for the foreseeable future. But we now share power with real rivals.

Europe as a whole represents more economic might than the United States. Our debt to China means our economy is intimately linked with theirs. And our military might is stretched thin over two conflicts - we wouldn't want to take on any more.

To be more specific about today's headlines:

A strengthening Chinese currency will produce winners and losers in the United States.

The winners:
(1) Exporters. The Chinese will be able to buy more American goods and services.
(2) Import-competitors. Americans will buy more American goods & services, fewer Chinese.

(Aside: the biggest winners are other developing countries who compete for US market share, like Mexico!)

The losers:
American consumers. We'll have to pay more for Chinese goods. That could put a real damper on most Americans' spending patterns.

In the long-run, this is good news for the United States... and for global monetary stability. It will help address our debt to China. But in the short to medium run, we'll be tightening our belts as we adjust.

(Aside: For me personally, it is exciting - a stronger Chinese currency means that more students from China can afford to study abroad here in the United States... And maybe more Chinese Universities will invite me to lecture over there. No, this is not an advertisement - sadly, Blogger is blocked in China.)

The European Monetary Fund is less of a big deal. In the 1950s, 60s, and 70s, European countries borrowed from the IMF and had to accept the conditions attached. With the United States as the largest shareholder of the IMF, this gave our country some influence over policy in Europe. But Europe turned away from the IMF a long time ago. With Greece flirting with the idea of turning to the IMF for a loan, Germany and France are moving to make the divorce more final; Europe will deal with European monetary affairs.

But this European monetary move adds impetus to other regional organizations, like the Chiang Mai Initiative for Asia, and the Banco del Sur for South America. Global governance going forward will be increasingly based along regional lines. The United States will no longer have as much influence - neither directly, nor through its influence at the IMF.

So, the United States needs a new leadership style. We should continue to invest regionally, promoting our relations with neighbors, Canada and Mexico. And we should look to lead the world by engaging multilaterally. The days of effective US unilateralism are over. Cooperation with friends is the key moving forward.

Friday, March 5, 2010

Buy America... Bye America :-(

Congress is flirting with “Buy America” again, “complaining that money is going to projects that are creating jobs in foreign countries.” They’re pointing to the “Buy America” provisions in the 2009 stimulus package, which call for American firms to be favored over foreign firms when making government purchases.

Back in ’09, President Obama correctly observed that favoring US companies over foreign ones could “trigger a trade war” and send a message to the world that “we’re just looking after ourselves.” Indeed, the Buy America provisions have provoked outrage from important trading partners across the globe.

Yet, President Obama’s gentle leadership on this issue is not enough. We need his bold and courageous style to explain in no uncertain terms why protectionism is wrong for the United States.

On March 18, 2008, then-candidate Barack Obama gave the most important speech on race in the United States since Martin Luther King, Jr. spoke in the 1960s. He addressed fears that people have of others who are different from them. He explained that he was running for president because “we cannot solve the challenges of our time unless we solve them together.” The speech showed courage of leadership on a divisive issue, and it inspired many to vote for him.

These days, people are worried about the economy, and it is easy to let fears about people who are different – people of foreign countries – be our scapegoat.

Yet, let’s look back at other periods of stormy economy history. It is widely agreed that the world plunged deeper into the Great Depression of the 1930s because of insular “beggar-thy-neighbor” policies. Governments sought to bail out their own countries at the expense of their neighbors.

Now, as we live through times of economic woe, with crisis in country after country, isolationism is certainly tempting. We are seduced by ugly nationalism to deal with international problems, just as we have so many times faltered and turned to racism domestically. These poisonous fruits, however, can only spell further disaster.

So, while President Obama sometimes nudges in the right direction on this issue, his gentle prodding to tone down nationalist demands are simply insufficient.

We need bold global leadership from someone who understands the ways in which all people – from Kansas to Kenya, from Illinois to Indonesia, from Pennsylvania Avenue to Pakistan – are intimately connected. This is why we elected President Obama.

We need our President to forthrightly explain to the American people exactly why a Buy America approach is wrong:
We live in a globalized, multi-polar world. Simply put, we cannot solve the financial challenges of our time unless we solve them together.