And the problems aren't over yet
With Portugal potentially just days away from seeking an infusion of funds from the rest of the Eurozone, one might think that the region’s policymakers have enough to worry about. But according to Business Spectator’s Karen Maley, Europe is heading for a potentially massive shock to its banking system as the European Central Bank signals its intention to raise interest rates in the second half of the year. Eurozone inflation is ticking upwards, and potential supply constraints from the on-going Middle East crisis (oil) and the Japanese earthquake/tsunami (electrical components) may only exacerbate this. But rising interest rates will clearly hurt weaker European countries — particularly Portugal, Ireland and Greece, and conceivably Spain — who need to service their debts (since they will pay more in interest). Moreover, proposals for the new European Stability Mechanism are making existing bondholders nervous, as they look to be pushed down the queue in getting their loans repaid. Consequently, they’re selling out, raising borrowing costs higher still for Europe’s troubled “periphery”.
The gathering outside a McDonald’s in Beijing — of all the places to start a Mickey Mouse revolution — was more like a meeting of the Foreign Correspondents’ Club, so heavily did journalists outnumber protesters.
David Pilling, Financial Times
It is safe to say that the so-called ‘Jasmine Revolution’ that pro-democracy activists have tried to foment in China has not taken off. Few Chinese, it seems are willing to jump on the revolutionary bandwagon — particularly not when the country’s economy is performing so well. But a bigger reason appears to be that the government has fiercely cracked down against, what are from its perspective, troublemakers. Indeed, for a regime that surely isn’t under serious threat from events in the Middle East and North Africa, its response has been strangely excessive. What does the Communist Party have to fear?
Most obviously, a faltering economy. That might not seem immediately obvious when the Chinese economy is growing at 10 per cent a year. But inflation is sitting stubbornly above the country’s target of 4 per cent, and efforts to clamp down on rising prices — particularly rising wages — may stir resentment. Inflation is also being stoked by free-flowing credit from banks. Rising interest rates may in turn cause some businesses and individuals to default on their loans, a particular worry in the context of the country’s building boom (perhaps more accurately described as a bubble). These fears can’t be overstated when you consider how underutilised much of China’s new infrastructure is, from empty office blocks to fast rail lines leading nowhere. The biggest problem with such imbalances is the inevitable correction: a process that gets more painful the longer you try and push it off.
This Valentine’s week the collective economic heart of the U.S. burns for Germany. But this infatuation is more desperation than love. The February crush says more about the economic troubles of both nations than of their charms.
Amity Shlaes, Council on Foreign Relations
The German stock exchange looks set to buy the NYSE. And Americans are saddened to see Bundesbank President Axel Weber seemingly rule himself out of contention to take over the helm at the European Central Bank. US-German relations seem to be on a high.
But hold on, warns Amity Shales in a new Bloomberg column, there’s no guarantee that a Deutsche Boerse merger with NYSE-Euronext will be a winner. (Just ask carmakers Chrysler and Daimler how their marriage worked out.) And Axel Weber might be a well-regarded inflation ‘hawk’. But there’s little evidence Europe has much appetite for fighting inflation at a time when the region is in economic turmoil — and, besides, Germany’s economy is not problem-free. (Yes, it is an exporting powerhouse, but in no small part due to a lack of domestic consumption — spendthrift Germans force the country’s manufactures to sell abroad if they want to survive.)
Buy high, sell higher
Commodity prices are rising — petrol prices, up; food prices, up. Should this be a concern? Clearly the weekly shopping becomes more expensive under such circumstances. But from a broader economy-wide perspective, such inflation only becomes dangerous when price rises in one area encourage prices for other goods and services (including labour — that is, wages) to rise in turn. At least in the United States, that doesn’t appear to be happening. Economic recovery there is still fragile, so businesses are reluctant to jack up their prices if that might turn away their customers. Similarly, with unemployment at 9%, few workers would reckon their chances of getting a pay rise as being particularly high. But as conditions improve, it is harder to forestall the cyclical impacts of such inflationary pressures. Moreover, as Caroline Baum notes, if people expect prices to keep rising, those expectations will influence behaviour today. As a practical example of this, some businesses are stockpiling goods to sell tomorrow at a higher price than they could be sold at today. Federal Reserve chairman Ben Bernanke insists central bankers will act to fight inflation at the right time, but it seems not everyone is convinced.
Bernanke is currently setting monetary policy for around 40 per cent of the global economy. Not only is he setting interest rates for the United States, he’s also indirectly running monetary policy for those countries which peg their currencies to the US dollar, including China.
Karen Maley, Business Spectator
US Federal Reserve chairman Ben Bernanke has a tough enough job just in a domestic sense — balancing inflation expectations against stubbornly high unemployment, all while trying to fend off politicians on Capitol Hill — without having to worry about what his decisions mean in other parts of the world. But ultra-loose monetary policy may be helping to stoke inflation in emerging markets — primarily, China. This in turn presents a threat to the US economic recovery. Two solutions are on the table: the US can raise interest rates, or developing countries can allow their currencies to appreciate in value against the US dollar. None of these looks likely to happen in the short term. Somebody has to be first to blink, but by the time it happens, a global inflation dilemma may well have become firmly entrenched.
