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Global Crisis Blog

Nations as Brands:  America Improves!

By Shlomo Maital

   The BBC World Service regularly conducts polls about how people around the world perceive nations, asking whether Country X’s influence is mostly positive or negative.

        The latest such poll was published on April 18. It covers people in 28 countries.  Here are the results:

*  Negative ratings of the U.S. dropped by a huge 9 points during the past year.  The US is viewed positively, on balance, in 20 or 28 countries, with 46% saying it has a positive influence, while 34 % say its influence is negative.   Much of this change can probably be attributed to the departure of George Bush and Presidency of Barack Obama.

*  Germany is most favorably viewed, with a 59% positive rating, followed by Japan 53%, UK 52%, Canada 51% and France 29%.  The EU is viewed positively by 53%.  

*  Iran is the least favorably viewed nation (15% positive), followed by Pakistan (16%), North Korea (17%), Israel (19%) and Russia (30%).    

* The US has now overtaken China in terms of positive perceptions.

*  Mexico has low ratings, perhaps owing to the drug-related violence. 

* People in China and Russia have changed their views on Iran; far more see Iran in a negative light, far fewer, in a positive light.

      Perceptions of nations have a direct measurable influence on countries’ trade and foreign investment.   Israel’s negative perception has held true for years; its leaders do not seem overly concerned.  Unless this image problem is dealt with head on, it will soon find expression in Israel’s economic wellbeing.

Global Crisis

Financial Times’ Martin Wolf Clears the Fog:   Why You Should Read Every Word

By Shlomo Maital

    Of all the economics columnists writing today in the financial daily press, I urge you to follow and read Martin Wolf.  This prize-winning journalist is able to slice through the fog of jargon and uncertainty with sharp analysis.  His style is not lively or filled with metaphors.  But please, persist.  If you read Martin carefully, you will understand what in the world is going on.

    And, yes,  what in the world IS going on with Britain?  Here is Martin Wolf’s ‘take’ on it, in today’s (April 14) FT issue (p. 11, “Only rebalancing will revive Britain’s precarious economy”). To save you time I will “interview” Martin and summarize his argument, adding some points of my own.

     What is a ‘balanced’ economy?

    One in which money taken out of the system in saving is offset by money put back into the system, as demand, by government, exporters, consumers and businesses, creating just enough demand for growth and full employment without inflation.

     Does the U.K. enjoy this balance now?

      Not at all.  Households have a net savings surplus.  So do businesses (they spend less than they earn).  Government, though, has a big deficit.  It has to borrow one pound for each four it spends.  This creates massive debt which rattles capital markets.   More is still being withdrawn than put back in, hence Britain’s weak economy.

     Why doesn’t the government cut its deficit and borrowing?

     Because if it does, the recession will deepen, because — who will take up the slack in demand? 

    Will there be a crisis, Greece-style?

    Perhaps.  If private spending and exports recover to generate demand,  the UK govt. can cut its deficits without ruining the economy.  This would be a smooth ‘rebalancing’.  If private spending, investment and exports do not recover, and the government slashes its deficits, the recession will become ‘double dip’.  This would be rocky unbalancing.  British  Households are saving more, because they are struggling to get out of debt.  The worse the deflation is, the more burdensome the debt. 

    Is the falling value of the pound sterling a problem?

    It is for Britain’s bloated financial system. A strong pound helps it make money.  A weak pound drives money away. But it is the solution for Britain’s exporters, and Britain desperately needs to boost its exports.   Can the weak inefficient British manufacturing sector shape up and drive exports?  Some are doubtful.  Can the ‘real’ economy (exporters) overcome the sham one (financial services)?  Stay tuned.

    Do other countries have the same problem?

   Yes.  The U.S.  There too, deficits created enormous debt overhang.  There too, business investment and exports have not taken up the slack.  There too, manufacturing is moribund. Rebalancing is as vital and as tricky in America as in Britain.  It will take a very clever, steady hand on the policy rudder.  As Martin Wolf puts it, “this is going to be a very tricky policy performance”.   With Britain’s political system facing a divisive and probably non-decisive election, and with America’s political system more partisan than ever, with rancor between Republicans and Democrats,  very little bipartisan good will can be mustered to handle this rebalancing. 

    The conclusion is that in contradiction to popular opinion and wishful thinking on Wall St. and among many businesses, the 2007-9 crisis is far from over.  It is metamorphosing, changing its form from a banking and financial crisis to a national crisis — one where governments’ solvency itself is questioned.  In some ways this is worse.  Government policy has shifted from being the solution to potentially becoming the problem.   If you thought the bankers were great at ruining their businesses — wait until you see what the politicians can do to theirs.

Global Crisis Blog

What We Learn from Greece’s Crisis

   What can we learn from Greece’s debt crisis?  This is the question raised by Paul Krugman in his recent NYT column. 

     (As he wrote it, the EU was waking up and coming to Greece’s aid, belatedly. Germany has dragged its feet on this bailout for months, and the euro has plummeted as a result.   Germany’s position was: Why should German  taxpayers bail out the Greek spendthrifts?  Answer:  If you don’t, Germany and all Europe will suffer.)

     It is not a debt crisis, Krugman rightly observes.  Greece’s debt burden is not excessive. 

     What is the problem, then?

     It is a “I’ve painted myself in the corner” problem.  Greece is in the EU, adopted the euro (abandoning the drachma) and now cannot devalue its currency to boost its economy.  It is stuck with the euro.  It could withdraw from the euro zone, but that would cause a huge run against Greek bonds and stocks.   Greece cannot raise interest rates, because those are now set by the ECB, the European Central Bank.  Greece cannot ‘inflate’ to reduce the debt burden, as other nations have done in history, because, frankly, what Greece needs to do is deflate,  lower its wages, prices and costs in order to become more competitive within Europe.  But if it deflates, the debt burden becomes much more onerous, rather than less so. 

     Even if the EU does bail Greece out in the short run, long run structural problems will remain.  And Greece is not alone.  Other nations, like Portugal, Spain, and Ireland, perhaps even Italy, share them.   Consider America.  When California has a huge real estate bubble, and goes nearly bust, there is little the Federal Govt. can do to help California specifically, at a time when other parts of America are doing better.  This is the problem with an integrated economy.    There are big gains to such integration (a large efficient Single Market) but big problems, when a part of the market gets into trouble.

     So what can Greece do?   Savage spending cuts and tax hikes, says Krugman, to slash deficits and reduce borrowing.    But this would worsen unemployment and cause political crisis.  We are left with a Hebrew saying:  Wise people (or countries) avoid crises clever people (or countries) can get out of. 

     Greece is not wise.  Hopefully it will be clever.