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Clash of economic doctrines

Publication Date : 10-09-2012


Life-and-death decisions being made to tackle serious economic woes in Europe and the United States, where opposing doctrines are colliding head on, will have far-reaching consequences for Thailand and the rest of the world, analysts say.

Exports, mergers and acquisition and capital flows will be the most exposed, they say.

Countries like Thailand can do little but wait for the outcome of the mighty clash between the austerity school and the prevailing camp, which gives unyielding support to more government spending.

Global financial development will reach another milestone this week after the European Central Bank last week divulged a massive bond-purchase programme to support troubled euro economies, sending shares rallying worldwide, including in Thailand, where the stock index hit a 16-year high.

The US Federal Reserve will decide on Wednesday whether to inject more money into the faltering economy via "quantitative easing".

And on that day the Constitutional Court in Germany might derail the rescue plan for Europe as it delivers a verdict on whether the new European bail-out fund and fiscal package violated German laws.

In the United States, due to weak job data released on Friday, it is likely that the Fed will again pour massive liquidity into the economy in concerted action with the ECB. Job creation has sparked a heated debate in the American presidential election campaign. Democrat President Barack Obama and his rival Mitt Romney from the Republican Party have been trading blame for the abortive recovery and stubbornly high unemployment.

Thailand's increasing reliance on exports has put it at the mercy of the austerity versus spending clash on the global stage. As in the US and Europe, opinions in the Kingdom are divided.

The international showdown of economic thinkers features one side led by the "Keynesians", who have forcefully called for larger government spending and monetary expansion in order to re-boost growth and create more jobs.

The other camp, "the Austerians", has been faithfully preaching the virtues of government spending cuts, hawkish monetary policy and fiscal discipline - a formula they believe can re-create market confidence and guard against the threat of high inflation.

Two Nobel laureates in economics, Paul Krugman and Joseph Stiglitz, have criticised Obama's previous stimulus package of US$787 billion as too little, resulting in a slower pace of recovery and a high unemployment rate of 8.1 per cent for last month.

They call for larger stimulus packages by the US government and other stronger economies like Germany.

The Keynesians believe that many countries prematurely rolled back stimulus programmes after all major nations made concerted stimulus efforts in 2009 to stop a free fall from the 2007-8 financial crisis.

Krugman calls for unconventional measures due to the tepid recovery and high joblessness after four years.

He has urged the Fed and the ECB to set a higher inflation target for the next five to 10 years at around 3-4 per cent in addition to injecting massive liquidity via bond purchases.

The aim of allowing moderately high inflation is purportedly to encourage household and business spending to counteract a collapse of demand caused by the debt-induced de-leveraging process in the middle of the global financial crisis. He also proposes larger debt-relief schemes for troubled home-owners in the US.

He has urged the US to take a tough line against China and other currency manipulators by imposing trade sanctions if necessary. The proposed measures were meant to help US exports partly suffering from artificially low values of the yuan and other Asian currencies.

Fed chairman Ben Bernanke and ECB president Mario Draghi, as well as many economists at the Inter-national Monetary Fund and Bank of England, are pro-growth, although some of them may be considered to be moderately so.

The Austerians include Raghuram Rajan, an influential economist at the University of Chicago, Alberto Alesina, economist at Harvard University, Jean-Claude Trichet, former president of the ECB, and economists at the Organisation for Economic Cooperation and Development and the Bank for International Settlements.

They are buoyed by such high-profile politicians as German Chancellor Angela Merkel and British Prime Minister David Cameron.

Rajan has called on Bernanke to end the ultra-low rate policy. He warned of a possible return to high risk-taking and asset inflation. This school believes that structural reform is far more important than stimulated demand. The ECB began raising its interest rate early last year in face of high unemployment in Europe. The rate hike shocked the Keynesians but pleased the Austerians.

Cameron has been implementing spending cuts to reduce budget deficits. Predictably, he was praised by the Austerians but the Keynesians pointed accusingly to the deeply depressed economy resulting from the spending slashes.

The Austerians used the Greek crisis as an example of irresponsible fiscal spending, while the Keynesians argued that many other troubled economies in Europe suffered as a result of the domino effect of the financial crisis, not fiscal profligacy in the first place.

The opinions of experts interviewed by The Nation are as diverse as those anywhere else, either urging caution or suggesting that local businesses should always look out for opportunities and seize them.

Kosit Panpiemras, executive chairman of Bangkok Bank, said last week that the debt crisis in the West would not easily go away, so Thais "should not spend beyond their means in order to avoid getting into the debt trap" experienced by households in the US and euro zone.

Somchai Jitsuchon, research director at the Thailand Development Research Institute, said he leaned toward Krugman but did not completely agree with him.

"Continually depressed economies in Europe and the US will certainly affect our exports as we have witnessed drops in the past months," he said. Recently, the Bank of Thailand reported that exports in July dropped by 3.9 per cent year on year due to the global slump. "There will be a lot of uncertainty over the next six months," he added.

A PTT source said energy giants in the West are taking a more cautious approach to new investment, leaving more opportunities for PTT, the national energy conglomerate, to win bids or enter into joint ventures for many energy-related businesses.

Lee Boon Keng, head of investment solutions at Bank Julius Baer, who is based in Singapore, suggested that Thais look at investment opportunities in the US particularly due to signs of recovery in real estate. "The US economy is recovering but it is going to face headwinds from a slowdown in Europe and China," he said.

Asean economies will be governed by how the global economy is doing, particularly the big ones - the US, China and Europe. Policy dynamics in Europe make economic issues complicated, he added.


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