The Gordian Knot of global economic growth

The mood at the recent “Summer Davos” session of the World Economic Forum in Dalian, China, was surprisingly upbeat. Participants seemed to be breathing a collective sigh of relief: The prospect of a financial meltdown in the euro zone is fading, the

United States has staged a moderate recovery, and even the recent economic news from China has been relatively positive. China’s new premier, Li Keqiang, adopted a notably more confident tone in his opening address than his predecessor Wen Jiabao did at last year’s meeting.

And during one of the breakout sessions, Malta’s prime minister, Joseph Muscat, even managed to sound shocked that anyone would still question the survival of the euro zone.

However, the future isn’t as rosy as many may want to believe. In truth, although another financial crisis may have been narrowly averted, the longer-term outlook reveals a global economy that will remain quite fragile. Structural reforms to prevent a recurrence have yet to be implemented, and it’s becoming clear that we’re transitioning to a period of much slower economic growth than what we’ve become used to during the last decade. Unfortunately, each of the principal actors on the world economic stage—the E.U., the U.S., and China— is currently hamstrung when it comes to the ability to take the decisive action needed to jump-start the growth engine. It’s as if the global economy is being strangled by a gigantic Gordian knot from which it cannot untangle itself.

The European Union’s impotence stems from its reluctance to accept that political independence brings stagnation, whereas further economic integration can lead to prosperity. The E.U.’s existing governance structure may have succeeded in ending centuries of almost continuous warfare—the organization even received the Nobel Peace Prize in 2012—but it can’t provide the strong oversight required to effectively manage the highly divergent, yet increasingly interdependent group of 28 economies that are now included in the euro zone.

Europeans will simply have to come to terms with the fact that their union needs greater economic, fiscal, and political integration to remain competitive and avoid future financial crises. It’s frustratingly clear what needs to be done, and creating a single finance ministry, treasury, and bank with centralized control over member states’ budgets and economic policy would be a good start. Yet it’s equally clear that the political resolve to do so any time soon is virtually nonexistent.

The United States also seems to have lost its ability to implement sound economic policy adjustments, struggling to make even straightforward tactical decisions, including, as of this writing, raising the debt ceiling.

[Read More+]

Comments are closed.