Lost decade

IMF chief Christine Lagarde raised the prospect of a “lost decade” unless the world comes together and agrees on dramatic measures to contain and possibly resolve the European debt crisis threatening the global economy. She issued this warning while in China, hoping to encourage the economy with the largest foreign
reserves to step up and help the beleaguered Europeans.

The manner a whole decade might be lost is easy to imagine.

The financial crisis in the Eurozone could paralyze the global banking system in a manner that makes the 2008 meltdown look like a minor discomfort. The European economies, a major market for the rest of the world, will cease growing. The effort to bail out Greece and possibly rescue Italy, Spain and Portugal will force up inflation and cause the euro to depreciate.

A cheaper euro will further dampen European consumer demand for goods produced by emerging economies, constraining their own growth. A global slowdown will ensue. The millions trapped in poverty will remain trapped in that condition for a very long time.

Just hours after Lagarde warned of the world losing a decade, the EU announced a downward adjustment in their growth projections for this year from 1.8 percent to just 0.5 percent. Even that lower projection, it seems, is a fighting target. An increasing number of analysts are predicting that the Eurozone will soon slide into recession.

Hong Kong, a trading economy, is a vital barometer on where the global economy is heading. This week, Hong Kong announced its economy was officially in recession. It had gone through two quarters of contraction.

This week, too, yields on Italian bonds broke through the seven percent ceiling. At that level, Italy cannot continue for very long servicing its outstanding debt. Other European countries that broke through the seven percent yield ceiling on their sovereign bonds — Ireland, Portugal and Greece — eventually required a Eurozone bailout.

That funny guy, Silvio Berlusconi, finally resigned — an event that stock markets worldwide celebrated with a price rally. Early this year, with much braggadocio, he declared that Italy will never require a bailout. Today, the Italian financial fiasco had worsened such that the euro stabilization fund will be insufficient to rescue it.



The word out of Rome is that Berlusconi will be replaced by Mario Monti, a widely respected economist. Over in Athens, Papandreou, who also once said Greece will never require a bailout, has been replaced by Lucas Papademos, former head of that country’s central bank and currently vice-chairman of the European Central Bank.

That is the equivalent, in our situation, of installing Say Tetangco as the country’s chief executive. Although constitutionally impossible in our case, that is not a bad idea, considering the present drift of things.

All over, as the financial crisis deepens, nations are turning to technocrats and shunning politicians. It is the markets, after all, that effectively exercise veto power on the actions of political leaders by pricing up or pricing down their bonds, or simply by turning bearish and clinging to their cash.

Whatever “dramatic” responses Lagarde is hoping for is not clear. The policy toolbox is quickly emptying. The European Central Bank, for instance, cannot raise rates to rescue the euro because that would surely push the continent into a full-scale recession. But a falling euro will have the same effect.

Critics are now taking the EU to task for its painstakingly slow and incremental response to the deepening crisis. The more daring analysts are now suggesting the entire union be reinvented. The economic community might be broken up into two or three tiers, depending on the level of competitiveness and quality of economic management of its 27 member-economies.

Growth engines

Today, the APEC summit is underway in Honolulu. The European crisis and Asia’s response to it occupies the agenda.

The world is looking to the Pacific Rim economies to step up and provide the engines of growth for the global economy in the face of financial turbulence in Europe and stagnation in North America. Some of the APEC economies are certainly capable of coming to the rescue: China and Japan with their massive reserves, Indonesia and Vietnam with their robust growth rates, Australia and New Zealand with their strong minerals exports.

I am not sure what the Philippines can commit to this grand effort. Over the last few months, we have exhibited serious signs of economy weakness.

This week, we figured high in the unenviable list of the worst economies in the world to do business in. The Philippines receives only two percent of total direct investments flowing into Southeast Asia. Our own figures reflect that: direct investments in our economy fell by 55 percent year-on-year in August and 19.2 percent in the period from January to September this year.

Our export figures are no less troubling. For September, our exports declined 27.4 percent, continuing a five-month trend. Specifically, our electronics exports (normally our most competitive sector) declined by 40 percent. The most important domestic factor explaining this is high power rates.

We have, indeed, increased our gross international reserves — although that is mainly due to adjusting to prevailing market price the gold stock we hold.

In response to these troubling numbers, all we get by way of a lame response from the administration is a vague statement about reducing red tape. What we need is a policy revolution to get business going and shield our economy from recession.

Right smack in the middle of a vibrant region expected to provide the engines of growth for the world, we could not seem to get our own domestic engines of growth started. -Philippine Star