of monies has covered over big cracks in both governance and policy frameworks in emerging economies. Furthermore, devaluations really do help balance the current accounts. As the world converges, emerging economies grow – an average of 5.7% GDP growth over next year as projected by the IMF - in relative size to the western or developed world. Ten years ago, the combined economies of Brazil, Russia, India, and China (the “BRIC” nations) equalled to roughly 29% of the US economy.
Despite the intellectual firepower of Keynesian economists, European (and other) governments are zealously tightening their belts. Following a
It is still not clear if debt really dampens GDP growth. Consider, by way of illuminating example, the astronomic US Federal debt level. However, the Eurozone’s track record suggests that prolonged austerity programmes hold back growth and thereby make the debt burden even heavier to bear. Excessive thrift will make us all poorer. If we all stop consuming and start saving at the same time, there will be fewer jobs to go around as demand for goods and services evaporates. The notion that austerity is the best solution to the economic downturn suffered by the PIGS and Europe’s other weak economies may be appealing to Germans but seems somewhat less attractive – or smart – when seen from any other perch. Germans like austerity
because it demands sacrifices by those poor souls dwelling in the periphery. Keynesian stimulus would require German money and “off-balance sheet” euro bonds issuing. The solution for Europe – and indeed for some other parts of the world - is to combine fiscal stimulus now with legally binding obligations to pay off the debts so created in a more prosperous future brought about by this extra spending. This was the central tenet of Keynes’ ground breaking work. However, most politicians only got the first part on spending your way out of trouble. The latter part, the one where they have to pay back in times of plenty, is regrettably less well understood. For now, more public debt is to be preferred to more unemployment and more misery.
Chairman’s Column
By 2007, these economies were equal to 53% of the US behemoth, while today they represent 91% of the US GDP. The comparison is even more marked when compared with flat-lining, no-growth Europe. The IMF predicts that by the end of 2014, the size of the Eurozone economy will not have progressed anything beyond its 2011 level.
decidedly non-Keynesian path, Europe’s economies are shrinking while still running budget deficits. Keynes’ core proposition was that when consumers and businesses set out to reduce their debt burdens - and private spending and investment stall as a result of that - governments should borrow to keep the ball rolling and pick up any slack.
Tor Svensson Chairman Capital Finance International
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