The ladies are in charge

Harvard professor Carmen Reinhart has just been appointed as the new Chief Economist at the World Bank. The Chief Economist at the IMF, Gita Gopinath, has also come from Harvard University. Both ladies have collaborated with Professor Ken Rogoff, from the same university. They might all think alike which is not the best approach in times of crisis. Diversity and contradictory opinions are much more creative, at a time when we have to imagine a new economic order. But they are all for debt forgiveness when the challenge is too big to be managed, which is not a bad approach. And they have studied financial crashes and deep national crisis extensively.

People say that when two economists discuss there are at least three divergent opinions. In this case, let us see if both ladies can bring fresh ideas to their institutions. The IMF and the WB will be very much in demand in many countries in the post-Covid situation. They must propose an approach that goes beyond austerity and keeps investments flowing across the globe, particularly in the direction of poorer countries.

Time for exceptional leadership to step up

This is a time of great anxiety. It’s a global challenge. It would require global political leadership, men and women in decisive positions of authority that would come together and would address the crisis with a single voice. It is not enough to have the G7 or the G20 finance ministers talking about debt relief and access to tremendous amounts of theoretical money. It is also not enough to get statements from the IMF, the WB or the WHO. Even the UN Security Council, if it could agree on a resolution, that would be good but insufficient. We need the key heads of State and government to agree on a joint declaration that would be some guide of roadmap out of the crisis. It would send an exceptionally important message of togetherness, cooperation and hope.

Unfortunately, we are very far from such a common position. The world is leaderless and more fragmented than ever.

If we can’t have a global message, why don’t we try to agree on a common European position at the leadership level? Is it too difficult to formulate a joint way forward, that would be larger than just talking about the post-crisis recovery, something of a shared vision about the kind of European society we would like to build together, after such a unique test?

The moment calls for leadership that can unite people and envision tomorrow’s world.  

IMF and the EU's ambivalence

The best people that could compete for the leadership of the IMF, following Christine Lagarde's departure, are not from Europe. They are from Mexico – Agustin Carsten, who is currently the General Manager of the International Bank of Settlements –, from Singapore –Tharman Shanmugaratnam, Chairman of the Singapore Monetary Authority and Senior Minister –, and from India – Raghuram Rajan, former Governor of the Indian Central Bank.  These three are head and shoulders above the names the European are putting forward as their candidates. In a better system of global governance, one of them should be the next Managing Director of the IMF.

But, again, it will be a European. This has been the game for the last seven decades. The US gets the top job at the World Bank and Europe goes for the IMF. The European will be chosen because of EU’s political considerations – the balance between the different regions of the Union – and that will be it. It might end up by being someone competent. But certainly, if we give credence to the short list that is under consideration, an intellectual pygmy compared with the names I mention above, from other parts of the globe.

This would have been an opportunity for the EU to show to the world that it means business when it talks about the reform and the strengthening of the institutions of global governance. But the EU leaders do not want to walk the talk. They prefer a narrower view and respond to their EU internal politics first.

It is a bit of a shame, isn’t it?

Greece: calling a spade a spade

Today´s prevailing position on Greece´s fate, in the European political and financial circles that have power, was rather clear: it´s time to call a spade a spade.

This basically means, as I see it, that those leading circles have come to the conclusion that the Greek situation has reached a decisive point. And the decision is to let Greece go its own way. It makes no sense to advocate for a solution that the other side does not accept.

I tend to agree. Default is painful but it is not the end of the road. Argentina and other countries have gone through that experience. Even California did. Default can actually be the beginning of a new cycle.

On the markets side, it looks as if the default possibility is now perceived as inevitable but with a manageable impact.

In the end, those who will be seriously affected are the poor people in the streets and villages of Greece. Unfortunately it´s always like that.

Greece´s poker game

The Greek government is playing hard ball. They are convinced, I guess, that in the end the EU creditors will do whatever it takes to keep Greece within the Eurozone. And their poker hand is based on that assumption.

It´s a risky position. Athens might know more than we know about the concessions the other Europeans could possibly be ready to accept. But I am not sure they know. They just take the chance and hope to be right, that´s what I believe.

At this stage it is difficult to forecast the events of next week or so. We are certainly close to a clarification. And that moment of truth might be a difficult one for the Greek people. 

Greece is now against a tough rock

Greece´s financial situation is now reaching a breaking point. We might have a surprise in the coming week or so as it is abundantly clear that the public coffers are more or less dry. The State´s engine is now running on fumes, no longer on real fuel. The chances of agreement with its European creditors have become pretty remote. They still exist, it is true. But they seem very unlikely. 

If there is an agreement it will be in response to the surprise I anticipate, to a major default crisis, a precipitated reaction to tears and shouts. Drama first, spur-of-the-moment repairs afterwards.

Greece´s very delicate position

Greece´s future is at play. One should be very clear about it. The new leadership will have to be very strategic in their negotiations with the key European actors. These actors have time and money and are in no rush to achieve an agreement. And they do not want to take any measure or agree on anything that might be perceived as a precedent, as a Pandora box.

The same cannot be said of the Greek side. They have little time and little money. They cannot engage in a very long process. Results will have to be achieved soon. And that puts them in a much weaker position. It is, in many ways, an almost impossible position. 

Ghana is not moving in the right direction

For a number of years Ghana has been a model country in West Africa. It has managed to move from chaotic politics and poor economic management in the Eighties to democracy and growth in the Nineties and thereafter. But recently things started to move in the wrong direction as the government gave up to extraordinary demands for salary increases and accumulated a high level of fiscal deficit. These actions were taken because the party in power thought they would bring in popular support. They brought economic bankruptcy.

Now, the situation turned to the worst, with the national currency losing value at a rapid pace and the state being unable to meet its commitments. The government had to call the IMF in. This will mean quite a number of public budget cuts. I do not think the Ghanaian public servants are ready for any type of salary reductions.

We might therefore see some political instability coming back to a country we would like to keep calling a model nation.   

Weak EU leadership

It is becoming fashionable in some of the European leading circles to blame the IMF for the failure of some financial adjustment programmes such as the Greek or the Portuguese. It is as if the EU Commission and the European Central Bank, the two other members of the Troika that has negotiated such programmes on behalf of the international creditors, had just been compelled to go along with the IMF.

Nothing is less true. In many ways, it has been the EU Commission that had shown up to recently the most dogmatic approach to programme design and its implementation. They have been the ones pushing some very single-minded ideas such as labour cost reductions and a short-term approach to fiscal corrections. Now, having realised that the public opinion is turning in large numbers against these measures, they backtrack and blame the weaker member of the group.

This shows again that the European leadership feels corralled against the wall and has no guts to fight back for their position.  

Strong, capable and accepted leadership is critical

The Portuguese Constitutional Court has reviewed the 2013 national budget law and declared four revenue generating measures invalid because they violate the spirit of the country’s Constitution. The cancellation of these fiscal initiatives has an impact on the overall budget deficit, as they increase it by 0.8% to reach a deficit of around 6.3% of GDP this year. This is way above the amount agreed with Portugal’s external creditors. It projects a negative international image that contradicts the very serious stabilisation efforts the country has implemented so far.

The Court’s decision has created a major political crisis. The Prime-Minister met the President this evening to review possible options. But there aren't many, in the short term. The stabilisation process requires a long time horizon. The country has to be able to convince its external partners that as it pleads for more time and flexibility it also stays the reform course. It has also to show that it has a strong, capable and accepted leadership at the rudder…  

Portugal on the street

Large crowds marched today in the key cities and towns of Portugal against the austerity measures the government is implementing. The key feature of these manifestations was their peaceful nature. People have shown, once more, that they can be on the streets and behave responsibly.

Many of the protesters could be defined as middle class families that are going through a process of impoverishment. For many of them and for many years their living standards were based on a fiction: that the country could afford a level of public expenditures that was well beyond the means of the economy. With the international financial crisis this fiction could no longer be sustained. The state could no longer borrow in the international markets at low rates of interest. To be able to finance the public sector and adjust spending to the real possibilities of the economy over a short period of time, the state had to look for funds coming from the IMF, the ECB and the European Commission. These monies came with strings attached, as expected. And that hurts. It hurts even further because the government has realised – but cannot explain it properly and clearly, for reasons that are beyond my understanding – that the long term sustainability of public expenditures calls for further cuts, particularly if one takes into account the fragility of the economy and the very low rate of productive investment that has been recorded so far.

In a country where the state was the true engine of the economy – unfortunately the private sector had not been able during the last two decades to take off and expand; it remained too dependent of state projects and orders and largely linked to political patronage – if public expenditure goes significantly down most of the economy tends to collapse.

The point is to get as many investments from outside as possible. My hope is that today’s popular civism be perceived by those potentially interested in investing in Portugal as an encouragement to do so. 

On Greece: what should we conclude?

On Greece, from today's Eurointelligence daily report:

Confidential troika report reveals significant delays in tax collection

Greece missed key revenue targets by a wide margin last year, triggering concern over whether the government is fully committed to cracking down on tax evasion and graft, the FT quotes a confidential troika report leaked to the Greek press. The collection of overdue tax raised only €1.1bn in 2012, compared with a target of €2bn, while unpaid tax increased by 10% to €55bn, equivalent to almost 30% of national output. Two years after the launch of broad-ranging tax reforms, Athens each year still collects less than 10% of total assessed taxes on personal income and corporate profits. Thousands of Greek company owners and self-employed professionals routinely contest their assessments through the courts waiting for the finance ministry to grant tax amnesty settling for a tax bill cut by at least 30%.  The official Greek translation of the report, dated January 31, was accessible on Thursday on the websites of several Athens newspapers.

The Portuguese kindergarten

The IMF has just published a review of Portugal’s public expenditures. The report came as a bomb at a time when the public debate about 2013 State budget had already generated an avalanche of political fights and great instability, including within the governing parties. Now, with the IMF’s recommendations on the table, the country looks like a big fire being dealt with gasoline. There is widespread cacophony, exaltation and very little self-examination and reflection. It is like a kindergarten without any adult in charge.