Adjustment or Reactivation?
Obama and the IMF revive the debate on the rate of spending cuts and public stimulus spending.
The Obama effect, concerns about the recovery of the world economy and about economic adjustments in the European zone, intersected yesterday with the rigorous politics defended by the Managing Director of the International Money Fund (IMF), Dominique Strauss-Kahn, who met with the president of the Spanish Government in La Moncloa. Strauss-Kahn wanted to reinforce the message of confidence in the Spanish economy which was broadcast massively and insistently the day before at the Brussels summit. The head of the IMF was clear, for better or worse: the Spanish government's measures to cut spending will be very effective in reducing the deficit, labor reform is headed in the right direction and for the measures to take effect, they must be applied and applied well.
This final clarification will come in handy because management skills are not RodrÃguez Zapatero's strong point. A government may come up with a solution but implement it badly. For the moment, Europe's massive support, the backing of the IMF and predictions that the European bank stress tests will place the Santander Bank and BBVA in positions far superior to those of German, French and British banks have slightly dispelled doubts about the Spanish economy.
While Strauss-Kahn was affirming Spanish solvency, Barack Obama was expressing his concerns about world recovery in a letter addressed to the G-20 nations. The American president laments the weakness of internal demands in the richest countries, insisting that the Chinese Yuan should be reevaluated, asking emerging countries to increase internal consumption and expressing his intention to bring about significant financial reform in his own country. However, he introduces an important clarification; in his opinion, past errors must be avoided, and he cites withdrawing economic stimulus measures too quickly as one of them.
Obama directly makes note of Europe. Remember that many economists, from the East to the other side of the Atlantic, maintain that austerity politics slow recuperation when concentrated on all of the countries in a given economic area at the same time. What's more, although Obama doesn't mention it, it seems obvious that no European country can compete with the effectiveness of the German adjustment; thus, no economy, from Greece to France, will be able to improve its competitiveness relative to Germany through austere politics.
This economic debate lacks an obvious solution. Some European countries, including Spain, are subject to the demands of their financial creditors, (the markets) and can only respond with spending cuts at the threat of a breakdown in public solvency; that forced action in turn reduces the capacity for reactivation. This vicious cycle can only be broken if two conditions are met: if a transnational authority regulates the intensity of each national adjustment and a political power greater than or equal to the markets is set up over them. As of today, neither of those conditions has been met.
The Obama effect, concerns about the recovery of the world economy and about economic adjustments in the European zone, intersected yesterday with the rigorous politics defended by the Managing Director of the International Money Fund (IMF), Dominique Strauss-Kahn, who met with the president of the Spanish Government in La Moncloa. Strauss-Kahn wanted to reinforce the message of confidence in the Spanish economy which was broadcast massively and insistently the day before at the Brussels summit. The head of the IMF was clear, for better or worse: the Spanish government's measures to cut spending will be very effective in reducing the deficit, labor reform is headed in the right direction and for the measures to take effect, they must be applied and applied well.
This final clarification will come in handy because management skills are not RodrÃguez Zapatero's strong point. A government may come up with a solution but implement it badly. For the moment, Europe's massive support, the backing of the IMF and predictions that the European bank stress tests will place the Santander Bank and BBVA in positions far superior to those of German, French and British banks have slightly dispelled doubts about the Spanish economy.
While Strauss-Kahn was affirming Spanish solvency, Barack Obama was expressing his concerns about world recovery in a letter addressed to the G-20 nations. The American president laments the weakness of internal demands in the richest countries, insisting that the Chinese Yuan should be reevaluated, asking emerging countries to increase internal consumption and expressing his intention to bring about significant financial reform in his own country. However, he introduces an important clarification; in his opinion, past errors must be avoided, and he cites withdrawing economic stimulus measures too quickly as one of them.
Obama directly makes note of Europe. Remember that many economists, from the East to the other side of the Atlantic, maintain that austerity politics slow recuperation when concentrated on all of the countries in a given economic area at the same time. What's more, although Obama doesn't mention it, it seems obvious that no European country can compete with the effectiveness of the German adjustment; thus, no economy, from Greece to France, will be able to improve its competitiveness relative to Germany through austere politics.
This economic debate lacks an obvious solution. Some European countries, including Spain, are subject to the demands of their financial creditors, (the markets) and can only respond with spending cuts at the threat of a breakdown in public solvency; that forced action in turn reduces the capacity for reactivation. This vicious cycle can only be broken if two conditions are met: if a transnational authority regulates the intensity of each national adjustment and a political power greater than or equal to the markets is set up over them. As of today, neither of those conditions has been met.