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Daniel Altman - Great Decisions

Daniel Altman

Daniel Altman is an economist and author of several books, including the international bestseller Outrageous Fortunes: The Twelve Surprising Trends That Will Reshape the Global Economy. He is the founder of Emerging Design Centers.

Transcript

Can you explain the financial origins of the European Union for us?

So the European Union started as a way, after World War II, to stop Germany and France from fighting each other anymore. The theory was that if you got them linked together economically they would have enough in common and enough common interests that they wouldn’t want to go to war anymore. So it started out with some of their major industries in energy and industrial production, but what it developed into was something much bigger: an economic union that would encompass many more countries in that area. Now the biggest manifestation of this economic union has been the euro, which is the monetary union amongst not all the countries in the European Union, but all but about 10 of them. They share a currency and they share a central bank – the European Central Bank in Frankfurt — that makes the monetary policy for the whole euro area. The problem is that these countries in the euro area have very different economies. They have very different economic cycles today and they’re going to have very different economic futures because of the risks and opportunities that they face. So making a single monetary policy for all of them is practically impossible. And now with problems that we’re facing in the European Union and the problems of supporting the euro, they’re talking about having a fiscal union as well so that the tax systems and the bonds issued from these countries are also coordinated. That would mean that the individual country governments would have almost no tools of economic policy to use by themselves to monitor and moderate their own economic cycles.

Now the idea was that if you brought these countries together using a currency union and the trading links, eventually their economic cycles would synchronize. The problem is that that hasn’t happened and in fact their economic cycles seem to be diverging even more. So the euro so far is an experiment in synchronization of economies that hasn’t worked, and is causing a lot of problems as a result.

What are the fundamental differences between the economic system of the European Union and the United States?

So, the United States is a currency union that works. We have fifty states, we all share the same currency, and we have some differences in our economy across the states; but it still works for us to have the same currency. Now there are two big reasons for that. One is that we also have the fiscal union, meaning that we have the backstop of taxes against our issuances debt and we can help to control the value of our currency that way, so that it doesn’t get too low and that it doesn’t get out of whack with the international markets. We also have labor migration, so that if opportunities are much better in one part of the country than in another, people can move and that helps to synchronize our economic cycles across the whole country. In the European Union, you have a little bit of labor mobility now. In theory, people who come from one country from the European Union should be able to work in any other country. In practice, it’s not always that easy and in terms of fiscal union you have almost nothing right now. So the European Union has the monetary union – they share the same currency – but they’re missing the other units that usually go into a successful currency, and that’s what’s making it so tough for them right now to manage this currency.

Why has that made their recovery much more difficult than ours has been?

Well, the problems with the European Union’s recovery have been manifold. It’s not just to do with the euro. It’s also to do with the fact that a lot of the countries that are in the European Union have built up some extremely big debts and it’s difficult for them to pay those debts, which were worsened by the global financial crisis, when they can’t do anything to devalue their currency. Usually countries have two ways to get out of debt, maybe three. One is to pay, one is to say we can’t pay and default, and another is to inflate it away by devaluing the currency in which they issued the debt; but because these countries themselves don’t control the value of the euro – that’s just at the European Central Bank in Frankfurt – they can’t devalue these debts on their own. The European Central Bank won’t lower the value of the euro for the sake of one or two countries like Greece or Spain. That’s really the problem and the incentive to get out of the euro as well, so they can have their own currency and control its value. In the United States we don’t have that problem. We can not only count on more reliable taxpayers to pay off our debt – in fact, the most reliable backstop for debt in the world is supposedly the U.S. taxpayer – we’re going to be paying for these debts for decades, but we will pay. The other thing is that we control our own currency and if we need to devalue it to increase our exports, increase our revenue, and lower the value of our debts; we can do that.

 How closely is the United States economy tied to the European Union?

The United States economy and the European Union are extremely closely tied together. They are the two biggest economies in the world. They’re almost roughly equivalent in size, about fifteen trillion dollars in output for each of them, and together they make up about half of the whole world economy. It is inevitable that there are lots of links between them. However, in the last couple of years, people’s expectations of the euro area crisis have worsened and people have started to say it’s going to take several more years to sort this out. There have been moves among investors, companies, and even consumers to detach themselves from the European Union a little bit here in the United States, so that they’re not as exposed to the risks that are coming from that part of the world. Now, it’s impossible to fully detach because with such huge economic ties as we already had between our businesses – importing and exporting goods, our people, we have multinational companies that do business in both areas, we have investors who invest in both areas – it’s impossible to detach completely. But people have been trying to insulate themselves because of the problems that they see coming down the road.

What impact do you see the crisis having on the United State’s economy?

There’s no doubt that the European crisis continues to be a drag on the U.S. economy. If I were President Obama, I would be calling up the European officials everyday. I’d be calling up the European officials to say, “You’ve got to sort this out because it’s hurting our economy,” not to mention his reelection chances. It will continue to have a drag until the uncertainty around the euro has been resolved. We need firm rules for who can be in the euro, who can be out of the euro, and what they need to make to make those transitions. And we need some sort of fiscal architecture to protect the euro against these enormous issuances of unsustainable debt. We don’t have any of that right now and moreover, the European Union has a terrible record of creating these types of agreements. Their stability and growth pact was supposed to keep budget deficits in their member countries down so that these problems didn’t happen. But the first countries to overstep those bounds were some of the biggest ones in the European Union, like France and Germany. So it’s hard to tell Greece to keep its act together when the big countries aren’t even doing it. So it’s going to take a huge movement amongst the European Union members to change things and solidify these rules, so that we do not have any uncertainty about who can be in the euro and what the euro might be worth in the future.

Is there anything else you’d recommend European Union member states and the European Central Bank to do to speed the recovery?

The key for the European Union now is to act decisively and transparently to commit itself in a credible way to rules about entry and exit from the euro and the issuance of debt within the euro area. If it can do that, then at least investors, companies, and consumers will know the rules of the game from here on out. We haven’t had that kind of transparency yet and that’s what’s created so much uncertainty. And that uncertainty has been the enemy of the market in the last couple of years and will continue to be so until this issue is resolved.

So if you were advising U.S. policy makers and central bankers, what would you suggest they do to mitigate the impact on the U.S economy next year?

The United States is in trouble, in large part because politicians in Congress have dropped the ball. We basically have not had any additional fiscal stimulus now for over a year, and we need additional fiscal stimulus to get this economy moving again. The economy is growing very slowly – 1.5% in the second quarter – that is not enough to create jobs on a large scale. Congress has essentially said, “No more fiscal stimulus.” As a result, we’ve had hundreds of thousands of jobs lost in government employment. We’ve had people falling out of government benefits that would support them and help them to support their families during this crisis. We’ve had huge expansions in the number of people who are poor and hungry. Even in the United States in the 21st century we have millions of people who are hungry. Congress has dropped the ball here, and they have given all the responsibility to ensuring the recovery to the Federal Reserve. Fiscal policy isn’t doing anything, so monetary policy has to do it all. The Federal Reserve has been doing extraordinary things to try to support the economy. They have invented new ways of trying to inject money into the markets and into the economy as whole, and it hasn’t quite been enough. Now there’s a lot of pressure on the Federal Reserve to do more; but the problem is that as the Federal Reserve extends its mandate even more and experiments with these different ways of stimulating the economy, they might be doing things that are a little bit beyond the pale. They’re getting involved in private markets in a way that a government entity was not necessarily supposed to do and they’re also losing starting to their credibility for the future a bit. They can’t necessarily say we’re going to be hard and fast with one set of policies when they keep innovating to do different things. This is a problem in the grand scheme of things and it’s a problem that’s been created by the consistent failure of Congress to continue to act. I would really point a finger against the Republicans in the House for blocking a lot of legislation that could have helped the economy and even provoking a manufactured debt crisis last year, which created a lot of uncertainty and probably cost us not only millions of dollars in extra debt, but a lot of job creation as well.

Is there anything we can do with fiscal and monetary policy to reduce the impact of the European debt crisis on the U.S.?

Partly because of the euro area crisis, investors have been fleeing and coming into the United States in droves, and that’s why interest rates on American debt are some of the lowest in history. It’s now so cheap for our federal government to borrow. They have the opportunity to get almost get free money from the markets and invest it in things that can pay really big returns for us in the future. Not only that, those investments can help to create jobs in the short term. I’m talking about things like building infrastructure which we’ve neglected for decades, improving our education system where we lag behind a lot of other countries in the OECD (Organization for Economic Co-operation and Development), and making big investments in scientific research. Science funding was frozen in the Bush administration, now we have a chance to really reactivate that type of investment as well. All of these three types of investments pay huge returns in the long term, much higher than what we would have to borrow at to make them right now. We have this great opportunity, partly as a result of the euro area crisis, to borrow cheaply, invest at really high returns, and help to stimulate our economy at the same time. That’s the kind of policy we need right now.

What opportunities does a democratizing Myanmar offer us?

So Myanmar is a fairly large country, population-wise, in Southeast Asia. It’s opening up right now, democratizing to some degree, and the United States is slowly taking off the restrictions so that American companies can participate there. One of the problems with investment in Myanmar right now is the United States is coming very late to the party. India and China, the two biggest neighbors, are already pouring investment dollars there and Thailand is actually the country, according to Myanmar’s foreign minister, that has the most attractive links for them in terms of the local economies. So I think the United States might come third or fourth in terms of the level of priority of doing business. That’s especially true because the United States has had restrictions on doing business with Myanmar in the past, which these other countries haven’t necessarily had. So the United States needs to get its act together if it wants to do business in Myanmar; but there’s no question that there are big opportunities in the power sector, natural resource sector, and just to serve the growing consumer market there which is surely going to get wealthier once the investments pour in.

What can United States do to remain competitive and not create conflict with China in Africa and Latin America?

The Chinese government has made it really clear that all of their investments, especially in international development, are meant to benefit the Chinese people. And that’s appropriate enough for Chinese government policy. It is acting around the world to secure the resources to grow in the future. It needs a lot of natural resources and energy resources in order to continue to grow and provide its people with the living standards they are going to expect in the next ten to twenty years. That includes not just energy and minerals to do manufacturing, but also food, water, and things like that. China is securing all of these resources in Africa, Asia, Latin America, and all over the world. Now, if the United States wants to get a share in these resources, it has to somehow distinguish itself. One thing that American companies can do is try to show that they have a long-term view that is going to benefit both sides. By taking a long time horizon, American companies will see that it benefits them more to see that their investments also have positive effects for the local communities. And when they do that and the local communities recognize those benefits and they are appreciative not just of the companies, but to their local governments that are working with those companies, then their local governments will be more likely to endorse American bids for investments in those resources. So I think Americans need to play the long game. China’s very interested in the short-term securing of these large amounts of resources, but it may not be as interested in the long-term development of these countries. The United States needs to show that it is interested in the long-term development of these countries as consumer markets and as potential strategic allies. By doing that, they will create a repeated relationship where they are a favored bidder of these large investment projects.