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Three economists gave a dubious assessment of the global economic picture, casting China and emerging markets as the locomotive of the recovery, with the U.S. a reliable freight car and Europe a wayward and iffy caboose.
The nearly $1 trillion package Europe recently fashioned to fend off crises — particularly ones in Greece and other countries along the euro-zone’s southern periphery — drew scathing reviews.
“The ECB did what they did because they wanted to keep the euro-zone together,” said Mickey Levy, chief economist at the Bank of America Merrill Lynch. However, the financial backstop “is only kicking the can down the road” and “doesn’t resolve the problem? Europe has a heap of structural problems.”
Mr. Levy, in a panel discussion Thursday at the Council on Foreign Relations in New York, said a restructuring of Greek debt looks inevitable, and noted that an exit from the 16-nation euro zone isn’t out of the question. It might be better for both the currency bloc and Greece if the two “agreed they had irreconcilable differences,” Mr. Levy said.
The two other panelists agreed that a restructuring looks likely — but that it wouldn’t necessarily also mean a breakup of the euro zone.
Joyce Chang, managing director and global head of emerging markets and credit research at J.P. Morgan Chase & Co., contrasted Greece’s plight with previous crises in emerging-market nations, which were quicker to act and not “in denial” about their situations. Ms. Chang also noted that Asian nations that weathered crises in the 1990s weren’t hamstrung by Athens’ heavy debt- and deficit-to-GDP ratios — or burdened by the wages and pensions that make up 75% of Greek public spending.
Emerging markets, from Asia to Latin America, are pacing the world with their growth, thanks in part to substantial commodity resources, Ms. Chang said. In turn, these nations will have to lead the process of nudging the world economy from economic-stimulus and rescue efforts toward “normalization.” Over the next three months, 13 emerging-market central banks will begin or continue tightening monetary policy, Ms. Chang predicted.
The Pacific Rim also got a vote of confidence from Dean Maki, managing director and chief U.S. economist at Barclays Capital, who said that some of Europe’s woes, such as the declining euro, could be a “headwind” to economic growth in the U.S.
However, the U.S.’s climb back hinges on a strong corporate sector, he said, which in turn would build employment and fuel business investment and spending. Among clouds on the U.S. horizon, Mr. Maki said, is the jobs picture, particularly the structural rate of unemployment which looks headed to 7% from 5%. This is due in part to a “mismatch of skills” — meaning openings for nursing positions aren’t much good to an out-of-work auto mechanic. Another factor is the weak property market, which means that individuals stuck with houses they can’t sell aren’t able to relocate quickly to areas with jobs.
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These three economists, in guardedly lauding the US economy, have forgotten the real estat bear that stalks us. Mortgage securities are defulteing in greater %%s than in the First Great Depression, housing is supported only by an expired tax credti, and FNMA and FHLMC are losing huge sums. The sound of the US economy is the sound of collapseing houses.
Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics. The Wall Street Journal’s Phil Izzo and Sudeep Reddy are the lead writers, with contributions from other Journal reporters and editors. Send news items, comments and questions to realtimeeconomics@wsj.com.
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