Claude Smadja: Some light at the end of the 2012 tunnel?

Next year might be better than the last

Whichever way you look at it, from a global perspective 2012 has not been a good year.

The euro zone has been sinking deeper in the last 12 months. The debt-to-GDP ratio remains the same or has even increased in many countries; unemployment has soared; and prospects for a recovery have receded even farther. Europe now faces a Grand Canyon-like divide between countries trapped in impoverishment and despair and a small group of countries regrouping around Germany who are holding up — so far. European Central Bank Governor Mario Draghi’s bold decision “to do whatever it takes to save the euro” and to unveil – despite German opposition – an unlimited bond-buying programme, if subject to strict conditionalities, has kept the markets quiet and allowed pressured countries to issue sovereign debt at affordable rates. 

While some welcome structural reforms have taken place across Europe, the one bit of institutional progress to be noted is the agreement on a single supervisory mechanism as a step towards a European banking union. However, as with almost every euro zone agreement, this has to be taken with a grain of salt. First, Berlin has ensured that the supervisory mechanism will only cover the 200 biggest banks. Germany does not want outsiders to poke their nose into its regional banks, which are the envy of Chinese banks in terms of cronyism and political interference in lending decisions. Second, a lot of very important elements remain to be negotiated and, of course, the devil is in the detail. Third, the whole mechanism – along with a joint deposit guarantee scheme and a joint resolution fund to wind down failed banks – will not come into force before spring 2014. Here again Chancellor Angela Merkel prevailed: she does not want any issue about German taxpayers paying for the rescue of foreign banks to cloud her party’s electoral prospects for the fall of 2013.

If one looks at the United States, the economy could not get out of its sluggish economic mode in 2012. Besides, the presidential campaign and the November elections did nothing to alleviate the now seemingly well-entrenched dysfunction in the American political system. As regards the continuing brinkmanship between Republicans and Democrats on the fiscal cliff, never before in modern history have narrow partisanship and rigid ideological dogmatism reigned so supreme in Washington. For all of us non-Americans, the key problem with this failure of leadership is that, given the size of the US economy and the present global systemic vulnerability, we risk paying the price of Washington’s irresponsibility.

The year 2012 has not been any better in the Arab world. The Muslim Brotherhood in power in Egypt and Tunisia has been either unable or unwilling to contain the more extremist forces that keep trying to impose their dogmatic vision of Islam. The Brotherhood has also failed to stop the deterioration of the economic situation. This is where the fate of the regimes in Cairo and Tunis will be decided. Libya is still struggling with chaos and the jihadists are gaining ground. Over the last 12 months, Syria – where jihadists are also on the move – has sunk deeper into a civil war. Jordan is becoming dangerously more unstable; the legitimacy of King Abdullah is being called in question for the first time. Bahrain, Kuwait and Yemen are seething with popular discontent and unrest. Stabilisation is more elusive than ever in the region, and any notion of a settlement between Israel and the Palestinians remains wishful thinking.

As we know, 2012 has also been mediocre for India, where, in the absence of reforms, business confidence has petered out, capital expenditure has sunk, and growth is languishing at 5.5 per cent. It’s not a rosy picture for China, either: important business developments in that country were frozen as everyone waited for the political situation to clear up and the leadership transition to occur. In the meanwhile, popular frustration and social unrest have continued to increase in the wake of blatant inequities, corruption and abuses of power. In Russia, what has followed the no-surprise re-election of Vladimir Putin is more like a regime swan song than a clarion call for economic and political revival.

If 2012 has been so disappointing, 2013 does not need, however, to look so bleak. Paradoxically, there might be some hope for Europe if a measure of recession shakes Germany out of its complacency and its psychiatric obsession with unlimited doses of austerity for other countries — while reminding the German people that they are a major beneficiary of the euro and that they are helping other countries not out of philanthropy but because of strict self-interest. Similarly, the days of reckoning might be coming for President François Hollande in France, bringing home the realisation that the more-taxes approach might be the fastest way for a worse economy.

In the US, if Washington manages to avoid falling off the fiscal cliff, 2013 might be the year when Barack Obama realises that fine speeches are not everything, and that after having been lucky to be re-elected – thanks to the ineptitude of his Republican challenger – this is now the opportunity to be a leader and to leave his mark as more than just a passable president. The year 2013 should also see Mr Obama moving further into his “pivot to Asia” strategy – which makes a lot of sense – and focusing more on the long-overdue priority of restoring the vigour of the American dream. In that respect the president has the golden opportunity offered by the many windfall benefits of the shale gas revolution taking place in the US.

Looking at China, the good news is that Xi Jinping and Li Keqiang seem more determined than their predecessors to tackle corruption and abuses of power, which are undermining the legitimacy of the regime. Whether the power apparatus will let them move ahead in that direction remains to be seen, but at least the initial pronouncements and some symbolic gestures of the new leaders are promising. And let us keep in mind that China can do better with a more balanced growth of eight to 8.5 per cent than with the previous 10 or 11 per cent.

Last but not least, it is not foolish to envisage that, despite the well-known constraints facing the government, 2013 could be the year when – with some effective reformist actions in the purview of the executive branch – India will again send a signal of reformist will and economic dynamism that will bring the “Hindu growth rate” up to what should be nine or 10 per cent a year.

The writer is president of Smadja & Smadja, a strategic advisory firm