It's now up to China to save capitalism
selected by Rael
The Raelian Movement
for those who are not afraid of the future : http://www.rael.org
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It's now up to China to save capitalism
It's official. Britain is sinking back into recession. OK, so technically we are not yet in one. A recession is defined by two successive quarters of economic contraction. We've only had one quarter formally confirmed. But not many would now bet on a positive outcome for the first three months of 2012.
By Jeremy Warner, Davos
9:25PM GMT 25 Jan 2012
How much of this is down to the euro crisis and other external influences, and how much to the Government's fiscal squeeze, will be debated long and hard.
Difficult though it is to believe given the extent of the monetary stimulus being applied through quantitative easing (QE), some even blame the Bank of England.
One banker here in Davos dates the slowdown to the Bank of England's decision to start withdrawing central bank funding from the banks, making credit conditions tougher than they needed to be.
The unlimited three-year liquidity provided by the European Central Bank to eurozone banks is a cause of some envy among British bankers. With alternative market funding again problematic and costly, it may only be a matter of time before the Bank is forced to follow suit. More QE can in any case be taken as read.
In Davos, news of the GDP setback was greeted with resignation and lack of surprise. If it were just a UK phenomenon, then the Coalition would have serious questions to answer, but it is European wide, and nobody believes it will go away until credible solutions to the eurozone debt crisis are found.
No economy is unaffected. One senior American banker reckoned that the uncertainty created in financial markets by Europe's debt crisis was knocking between one and one and a half percentage points off US growth.
Emerging market representatives at the World Economic Forum annual meeting are similarly dismayed, with the crisis now squarely blamed on failings in European governance rather than on finance and economics. This is not an economic crisis, said one Chinese policy maker, but a political and institutional one.
It's easy to see what he means. Failure to resolve the crisis is causing business to become frozen in time, not just in the troubled eurozone periphery, but increasingly in the core countries too. Everyone knows what has to be done - some form or debt mutualisation - but political leaders are afraid to confront the reality, for fear of the backlash from their electorates.
Rarely do you hear anything earth shatteringly new at Davos, but it does manage better to encapsulate the "global view" of what's going on better than almost any event in the international calendar.
Broadly summarised, it goes something like this: a pivotal year is expected in which solutions will be found if only because they have to be. The alternatives - break up or default in one of the eurozone's major economies - are thought too awful to contemplate.
But the longer things are delayed, the costlier it will be. Indecision and prevarication has already doubled the price from where it needed to be. These costs are now being paid in contracting output and rising unemployment.
A phenomenon which has been noted across advanced economies over recent years - quite serious levels of business disinvestment - is being turbo-charged by the uncertainties created by the European debt crisis.
Unable to earn a return, companies are supporting their profits through head count reduction and other forms of cost cutting. Business leaders already have good reason to look to the emerging markets of Asia and Latin America for growth; paralysis in Europe is accelerating these trends.
Western economies are in danger of being badly leapfrogged by the developing world in key aspects of competitiveness and infrastructure spending.
One example cited by Ben Verwaayen, chief executive of Alcatel-Lucent, is digital infrastructure, which because many developing nations are starting from scratch in their communications networks can be rolled out with all the latest technologies.
Gummed up by regulation and red tape, this sort of investment is not happening on an equivalent scale in the UK, Europe and even the US.
One of the disappointments of Davos so far this year is that I've not yet heard a single policy maker, banker or business leader make the case for the sort of radical deregulation and supply side reform vitally necessary in Western economies to kick start investment and growth.
Instead, an air of "capitalist guilt" hangs over this high Swiss Alpine resort, like low hanging cloud on the mountain tops. Apology for the market failures of the past is the order of the day, and few dare challenge it. Western capitalism is cowed.
Of course it is right that markets are made more responsible, and of course better ways of sharing the spoils of economic growth more equally have to be found. But advanced economies are finished unless they relearn some of the free market disciplines from which they sprung.
The contrast between Western gloom and Eastern optimism is again striking this year, and it is something that goes beyond the immediate challenges of the eurozone crisis.
According to forecasts aired by Indonesia's minister for creative industries, the total size of the world's middle class will more than double to 4.9bn by 2030, with 85pc of the growth occurring in the developing world. By then, some 65pc of this middle class will be in Asia.
Long term predictions of this sort are always going to be suspect, but few would disagree with the thrust of what the Indonesian minister is saying.
Much of the growth of the next two decades is going to come from the developing world, so that's where business and finance will focus their energies. Asia's low debt to GDP and massive foreign exchange reserves stand in marked contrast to the over indebted West, which still faces years of growth stultifying deleverage.
Asked what he thought the future held, Robert Shiller, Professor of Economics at Yale University, cited research that historically crises of this magnitude last at least ten years. Dating the start of the financial crisis, to August 2007, that would imply another five years to go.
Joseph Stiglitz, Professor Shiller's equivalent at Columbia, retorted that given policymakers were doing many of the wrong things, he found the idea of crisis abatement in 2017 "very optimistic".
Capitalism saved China, it is sometimes said; it's now up to China to save capitalism, for there is depressingly little sign of Western nations standing up for it.
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