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As the global economy continues to spin in unpredictable ways, economist David Hale provides an update on his book (co-edited with his wife, Lyric Hughes Hale), What’s Next: Unconventional Wisdom on the Future of the World Economy, a compendium of perspectives on the world’s biggest economies from more than 20 leading economists and experts.
Yale University Press, 2011
How can a small economy like Greece have such a powerful hold over the EU?
It does because the European economy has now plunged quite sharply. The overall growth rate was sterile in the first quarter. Germany had growth of 0.5 percent; Italy, Spain, Portugal and Greece are all in a recession, which gives us a very low number for the region as a whole. Compounding the problem, European growth will stay weak for the time being because throughout the region there is emphasis on fiscal restraint to reduce budget deficits. If Greece is forced out of the EU, it may very well have a contagion effect. It could lead to a sell-off in the bond market, and then possibly Portugal, Italy and Spain would be considered vulnerable to leave the monetary union.
If this were the United States, we’d have congressional hearings. Who would be on the hot seat?
Basically, the core of this problem is that when the European monetary union was created 12 or 13 years ago, it did not create at the same time a fiscal union. The European nations today all have their own fiscal policies and quite different wage policies, so there’s no convergence. And these divergences helped to create these problems in countries like Spain, Italy and Greece, so they became less competitive. Now they have to make an adjustment. Greece is having large pay cuts. Spain is having moderate pay cuts. Italy hasn’t done that yet, but it is being forced to renew policies making the markets more flexible. So there are a variety of things going on to try to reduce the competitive gaps that have developed over the last 10 years, since Germany was so successful with restrained wages.
Do you see a situation where this might work to the advantage of an economically stronger United States or Asia?
I think this will be a negative for European growth for the year ahead, and both America and Asia will suffer.
So the EU is an irreplaceable leg of the global growth stool.
Well, the European economy, in dollar terms, is actually larger than the American economy, so when Europe has a recession, the global consequences are negative.
Closer to home, do we have a Greek problem with our own budgets in California and Illinois?
Gov. Brown has admitted that California’s deficit could be twice as high as he had been hoping back in January—maybe $16 billion, not $7 billion or $8 billion. So California is at the same point as Greece.
If the eurozone holds together, are you making any kind of a forecast for European growth?
There is the potential for moderate recovery in Europe, probably again led by the conservative countries in the north— Germany, Finland, Austria, Sweden, Holland— and they’ll still reach a kind of bottom late this year or early next year. The postwar Germans have always been conspicuously fearful of inflation.
How does that ratchet up the problem?
Well, the fact is that one of the ways we will solve this European fiscal crisis will be to have a higher inflation rate in Germany than we have in the rest of Europe. Over the last 10 years, the last 15 years really, Germany took quite a step toward restraining wages, keeping inflation low, whereas wages have increased by more in countries like Greece, Italy, Spain and Portugal, making them less competitive. Germany now has very low unemployment compared to those countries. But we have recently seen wage increases in Germany that were much larger than we’ve had in recent years. At the beginning of the year, the head of the IG Metal Union raised wages possibly above 4 percent, so for the first time in many years Germany may have some wage increases, which will be positive for consumption, but it could also mean a somewhat higher German inflation rate.