Most of the central bankers and the head of the IMF ignored the power of voters in the developed nations, where growth and deficits are twin problems, when they made comments at the recent Jackson Hole annual financial forum. Politicians, however, were aggressively criticized for their failures to address stimulus needs and sovereign debt trouble. The bankers’ suggestions about more political cooperation ignore the upcoming national elections or changes in power in some of the countries with the largest GDPs in the world.
Ben Bernanke was the first of the banker to comment that the battle among elected officials in his country — the U.S. — was the most formidable stumbling block to the creation of solutions for the failure of GDP growth and deficit reduction. He said:
The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses. Although details would have to be negotiated, fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals.
Bernanke did not mention that a U.S. presidential election is only a little over a year away. Both Democrats and Republicans have taken many of the positions they will use to try to draw votes. First among these is the fate of tax rates and the future of Social Security and Medicare. Congress and the Administration would not have stretched approval of a new debt cap until the last moment if either believed that the outcome would not be an important issue in the next election. Politicians may be the villains, but they act largely on what they see as their prospects for reelection.
IMF chief Lagarde spoke about the effects of disagreements among countries in Europe. These are almost entirely due to the near-term political positions of the prime ministers and financial ministers in each of the countries involved. She said, “In such an atmosphere, there is no room for ambivalence about its future direction. An unclear or confused message will add to market uncertainty and magnify the eurozone’s economic tensions.”
Angela Merkel’s fate as chancellor has been jeopardized by some of her decisions that have backed aid to financially weak EU countries. Her bias toward support for these nations has changed recently. She rejected the creation of common bonds for the eurozone. The 2013 German elections are close enough, and polls show enough resistance to the country’s participation in bailouts, that her options to do anything more to prevent a sovereign debt crisis in Europe have been exhausted.
President Nicolas Sarkozy faces elections in less than eight months. He admitted recently that the sudden slowdown in France’s economy meant probable elimination of tax breaks for companies and probably new government expense cuts. “Sarkozy’s conservative government aims to cut the public deficit from 7.1 percent of gross domestic product in 2010 to 5.7 percent this year and then to 4.6 percent in 2012,” Reuters reports. His reelection chances would sustain a great blow if the country loses it AAA credit rating. France’s participation in the rescue of Greece and other southern European nations is nearly as critical as Germany’s.
Japan and the UK may not have been the targets of comments at Jackson Hole, but their options to stimulate their economies because of political battles are likely even more limited than those of the U.S. and EU. And, the competition for political power in each country is immense. The Democratic Party elected a brand new prime minister — Yoshihiko Noda. The third largest economy in the world will continue to struggle with the finance aftermath of the March earthquake. Last week, Moody’s lowered Japan’s grade one step to Aa3. Noda will be under pressure to set financial policy that will not increase Japan’s massive debt. Moody’s listed political turmoil among its reasons for the cut. Japan has had six prime ministers in five years.
UK Prime Minister David Cameron’s austerity plan has also been challenged as his country’s GDP grew only0.2% from the first to second quarter this year. Cameron promised voters ahead of the previous election that his fiscal policies were essential to improved national finances. But his budget to cut government expenditures will cause the loss of 300,000 government jobs. Many economists and his political foes say that his austerity programs are the reason for the faltering of the UK economy.
Neither central bankers nor the IMF head said a single thing about the role of voters in the acute deficit and stimulus problems that have become so critical. And politicians will not act in the best interests of their national finances if they believe they will not keep their jobs.
Douglas A. McIntyre