The good news about the mood at this year’s gathering of the good and the great at Davos is that there was no mood. Like a patient recuperating after a massive heart attack, Davos was under doctor’s orders to avoid any overexcitement and doing its best to comply.
There was hardly a frisson of enthusiasm about Friday’s sensationally strong US GDP statistics, nor much despair about the gloomy figures produced by Britain two days before. Nobody was willing to speculate too far ahead about the consequences of the political catastrophe for the Obama Administration in Massachusetts, nor pay very much attention to calls from President Sarkozy for a reinvention of Western capitalism in the years ahead.
The Greek delegation, rushing from room to room in a charm offensive designed to shore up confidence in its nation’s crumbling finances, provoked little more than polite interest, even as the markets priced in the likelihood of default or a break-up of the eurozone.
And the prophets of doom who had become media darlings at last year’s Davos with their blood-curdling extrapolations of multitrillion-dollar bank losses, government insolvencies and currency crises were notable for their absence this year.
Over everything, however, there hung the pall of two unspoken terrors: the possibility that last year’s financial heart attack might merely have been the precursor to the “Big One”, which really would prove fatal; and the certainty that, while America and Europe were quietly doing jigsaws in the rehabilitation ward, China was powering ahead.
Combining these two fears suggested a conclusion that was even more alarming: the crisis of 2007-09, although it had passed much faster and left the world economy much less damaged than predicted by any of the mainstream speakers at last year’s Davos, might really have marked a turning point of epic proportions. Could this have been the historic moment when Western liberal democracy lost its self-confidence and global prestige, leaving the authoritarian, government-led capitalism of China as the dominant politico-economic model destined to rule the world for centuries ahead?
Rather than try to answer this epic question, or even consciously to ask it, most people at Davos this year preferred to be distracted by peripheral issues. Financial regulation was the overwhelming favourite among these comforting distractions. But everyone from President Sarkozy and Jean-Claude Trichet to Larry Summers, President Obama’s chief economic adviser, and the Chinese Vice-Premier kept implicitly returning to the infinitely more important and troubling issue: can Western democracies redesign their political and economic systems to restore the prosperity and self-confidence swept away by the crisis, or will China’s authoritarian capitalism become the dominant form of socioeconomic organisation in the world?
While the official programme at Davos offered no answers to this big question, the background conversations I had there did suggest possible approaches to a few specific problems, which between them could help to restore some confidence to the Western world. The most interesting insights related to three issues: Greece and the euro; the political stalemate in Washington; and the outlook for fiscal and monetary policy around the world.
Starting with the last point, the message from all the policymakers was that reducing public deficits was absolutely necessary in the long run, but less urgent than markets and public opinion seemed to believe. Politicians, IMF officials and even central bankers all seemed to agree that the danger of tightening too early, and sliding back into a global recession, was much greater than the risk that governments would wait too long. On monetary policy the consensus was even stronger: given that political pressure is mounting everywhere to tighten fiscal policy more quickly than is desirable, interest rates will have to stay even lower for even longer than the markets expect.
In America, for example, there seems to be no chance that the Federal Reserve will raise interest rates before the year-end, despite the 5.7 per cent growth rate reported for the fourth quarter and even if this rapid growth is sustained. And if the Fed, with an economy growing at more than 5 per cent, is unlikely to raise interest rates this year, the probability of the Bank of England or ECB moving must be lower still.
As Mr Summers ruefully noted, the “statistical recession” may be over but the “human recession” is not. The clearest evidence for this grim contention came, of course, from the Massachusetts election and the gridlock it has imposed on politics in Washington. On this point, however, I heard an unexpected argument for hope. While it is true that American politics is now more divided than ever between two hostile factions, this does not mean the country will be ungovernable.
Imagine the rival parties as two separate “sets” and draw a Venn diagram, as taught by set-theory in high school. Normally, to pass legislation, politicians focus on the “intersection” or overlap, between the two sets — the issues on which both sides agree. These areas of agreement, in the present state of US politics, appear to be few. But there is another way to seek compromise: to look at the “union”, or totality, of all the issues included in both of the sets, instead of their intersection or overlap. In American politics this “union” would include Republican goals blocked by the Democrats and Democratic objectives previously unacceptable to Republicans. An example was the new energy policy proposed in President Obama’s State of the Union speech. By including strong commitments to nuclear power and oil drilling, the Democrats may garner enough Republican support to pass an energy Bill that also includes carbon limits and emissions trading.
A final impression from Davos relates to the euro and the Greek crisis. The Greek Prime Minister and Finance Minister said little that was not already on the public record, but they conveyed a very favourable impression of competence and honesty about their country’s problems.
They came across as straight-talking technocrats determined on profound reforms of Greek society and politics, not just some juggling with statistics. The most impressive fact they mentioned that previously had gone unnoticed was that the Pasok party’s popularity had risen in the three months since its landslide election victory, as the enormous scale of the fiscal problems and prospective Budget were revealed. This rise gave them confidence that last year’s riots would not be repeated and that the popular reaction to swingeing budget cuts in Greece would be at least as tolerant as in Ireland.
Even if this turns out to be true, it does not mean that the Greek Government will actually hit its fiscal targets, nor that its plans will succeed politically in the long-run, but it does suggest that the markets will stop attacking Greece once the European Commission approves its fiscal adjustment plan this week. In the long-run, Greece, Ireland, Portugal and Spain still face the inexorable Keynesian logic of a 1930s-style “debt-trap”. Trying to tighten fiscal policy in a recession is often counter-productive because even bigger deficits result from slowing economic growth.
The best way out of such a trap is to slash interest rates and devalue the currency, a policy not available in the eurozone. For the time being, however, the markets may give Greece the benefit of the doubt and redirect their attention to the need for a devaluation in the eurozone as a whole.
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