Saturday, 27 May 2017

China sees opportunity in the West’s loss of confidence

This review was published in the Weekly Standard under the title Tigers at Bay. 

There is little doubt among economic forecasters that over the medium term Asia’s emerging economies, China and India foremost among them, are expected to drive global economic growth. Taken as one, the region from India to Japan is not only the biggest market for raw materials, energy and the shipping industry that carries them; it is both the European Union’s and the United States’ biggest trading partner.

As a region, it is also more robust than either the EU or the US, where the International Monetary Fund forecasts that growth will rise from 1.6 percent last year to two percent next year. In contrast, ASEAN will grow by more than double that rate - 5.2 percent in 2018 - and even though growth is forecast to slow in China, it will still stand at an enviable six percent next year. In India, it will be 7.7 percent.

Wednesday, 3 May 2017

Greece and creditors reach a compromise of two conflicting working hypotheses

After four months of talks, Syriza reached an agreement in the small hours of Tuesday with its creditors, the Eurozone and International Monetary Fund, that allows the government to keep receiving bailout funds.

On the austerity side, Greece agrees to cut pensions by one percent of GDP in 2019, and raise personal income tax by one percent of GDP in 2020. Total savings: €3.5bn.  

On the expansionary side, the treasury gets to spend the same amount of money on a social spending programme that includes such things as school lunches, rent subsidies for the poor and job creation schemes (see full list below). The Eurogroup still has to approve the deal on May 22. 

This is how government spokesman Dimitris Tzanakopoulos described the agreement: 

“The Greek government believes that despite the delays caused by lenders’ unreasonable demands throughout the talks, the final agreement is balanced and sustainable. Despite the IMF’s initial insistence on measures worth 4.5 billion euros, we succeeded in a deal that has no fiscal impact. There will be austerity measures worth two percent of GDP, and expansionary measures worth two percent of GDP.”

Why the symmetry? Partly because Greece and the IMF appraise the economy entirely differently. The government says these latest measures are not strictly necessary. From the IMF's point of view, they are to ensure that Greece continues to produce a primary surplus of 3.5 percent of GDP beyond next year - that money going to pay off the debt. But Greece already produced a surplus of 3.9 percent last year on existing measures. Creditors simply aren’t convinced that that is sustainable. 

So the compromise is partly to pass contingency measures for the bad case scenario. The austerity measures are also designed to pay for the spending measures if the government's more optimistic view of tax revenues holds up. This, too, stems from the different views between Syriza and the IMF on what is good for the economy. Syriza believes in Keynesian pump-priming as the key to growth; the IMF believes the austerity measures to be necessary simply to maintain treasury savings, which it says will ultimately be undermined by creeping pensions spending. 

This compromise of two conflicting hypotheses demonstrates not only how different are the perspectives of Syriza and the IMF; it shows how difficult forecasting Greece has become.

The conservative New Democracy opposition points out that in December 2014, when Syriza led an expose of the conservative government’s commitment to a billion euros’ worth of cuts, the price tag for remaining in the eurozone was far smaller. It refuses to vote for the new package, allowing it to pass on the slim ruling majority of 153 seats in the 300-seat legislature.

This will expose it to criticism that it is playing politics as usual. The deal at least unlocks bailout funds Greece needs to keep receiving if it is to service ECB bonds in July. 

ND's stance will also come under fire for not supporting two important riders of this agreement: one, that the government won a return, in principle, of collective bargaining after 2018. This in theory means better working conditions and improved wages. And two, the deal clears the way to have a discussion on rescheduling the Greek debt over a longer repayment period to make it sustainable – something Syriza unsuccessfully fought for in 2015.

As finance minister Euclid Tsakalotos put it, “I am sure that there will now be the discussions on the debt because there is no longer any excuse that we don't have an agreement on the measures.”

Measure for measure: 
The austerity measures and counter-measures agreed for 2019-2020 

1. Austerity: €3.5bn

Greece will cut pensions to the tune of one percent of GDP. In practical terms, one third of pensioners will lose an average of nine percent of their income. 

The treasury will raise the equivalent of one percent of GDP by lowering the tax exemption salaried employees enjoy, from €6,836 to €5,681, or 17 percent. This is an effective personal income tax hike of about 3.5 percent.

Source: Eurogroup of 7 April and Greek government 

2. Expansion: €3.5bn

-       Greece won’t allow unlimited mass layoffs. These will remain capped at five percent of payroll per month.
-       Sectoral wage agreements will come back into force after next year.
-       Free preschools nationwide
-       50 percent of primary/secondary schools will serve free lunches
-       Increased rent subsidy of 100 dollars month on average for 600,000 households
-       €260mn on higher child subsidy for 3rd and 4th child  
-       Co-payments for medicine will go down or be eliminated for people earning under €1200 a month.
-       €250mn in labour expenditures (job creation)
-       €250mn in public works expenditures (again, job creation)
Source: Labour ministry - unofficial information