Home' acuity : Acuity July 2014 Contents revenues and make it easier for Russia
to switch off the gas to Europe,” worries
Hartwich, a German by birth, who
thinks Western Europe has left itself
militarily unprepared to deal with any
future Russian aggression.
Europe is also enduring a rapid
erosion of support for union. In
late May, anti-European integration
candidates received unprecedented
support in the elections for the
European Parliament, prompting
France’s President Hollande to declare:
“ The European elections have delivered
their truth, and it is painful.”
Europe won’t necessarily begin to
unravel, as the existing pro-Europe parties
will still hold around 70% of the votes in
the 751-member chamber, but economic
reforms will become more difficult.
“I don’t see a return to a full debt crisis
but we have a Great Depression-type
scenario playing out in Europe in terms of
chronic youth unemployment,” says Leigh.
While Europe and China are the pre-
eminent economic risks to the global
economy, the entire Western world has
entered an unprecedented monetary
policy experiment. White, who spent most
of his career in central banks in Europe and
Canada, is sure it will not end well.
“Artificially low rates have simply
brought consumption forward which
would otherwise have taken place
in the future – low rates don’t alter
the total amount of consumption
over time,” he says, suggesting the
improvement in economic growth in
Japan and the US, where central banks
have vigorously pumped money into
their banking sector, is ephemeral.
“Economies are complex dynamic
systems so it’s very hard to make
accurate predictions but it is logical
inflation will show up more generally
soon,” Leigh says, explaining one
economic shock would be all that is
required to jolt the world into a high-
“People will realise, potentially
suddenly, that rich country central
bank threats to lift interest rates to
stamp out inflation aren’t credible
because their own governments’ fiscal
positions are so vulnerable to high
interest rates,” says White.
“If excessive leverage was the
problem we certainly haven’t seen a
White’s is the minority professional
“ The record has proved Fed
detractors wrong year after year,” says
Wolfers, pointing to quiescent inflation
levels and improving economic activity
in the US.
“ The sustainability of governments’
fiscal positions is a bigger issue than
quantitative easing, although even
there I’m not too concerned,” he says,
middle of 2014, not all of it easy to explain.
In the wake of a tough federal budget
that sought to lay the groundwork
for a fiscal surplus in 2019 after what
will have been 11 years of deficits,
Australians and the country’s business
community remained gloomy.
Meanwhile across the Tasman in New
Zealand, not even two official interest
rates increases have dented soaring
household and business confidence,
while unemployment is predicted to fall
to around 4.5% – among the lowest in
the OECD – in the next few years.
Hartwich is a bullish about New
Zealand, noting the country’s trade
with China has risen five-fold since the
signing of a free trade agreement.
“Australia exports commodities that
countries need in the early stage of their
development, whereas New Zealand
exports agricultural goods middle class
countries consume,” he says.
Australia’s unemployment rate is
projected to rise to 6.5%, as the resource
boom continues to fade.
Leigh says Japan, still the world’s third-
largest economy and Australia’s second-
biggest customer, remains crucial to
Australia’s fortunes despite the fashion
to focus on China. “ The country has
stagnated for more than 20 years, which
suggests it’s an opportunity as much as a
threat,” he says.
The longer-term threat to global
stability may emerge from an
unexpected source. To indulge the
eloquent Durants once more: “The
relative inequality of Americans
before 1776 has been overwhelmed by
a thousand forms of physical, mental,
and economic differentiation, so that
the gap between the wealthiest and the
poorest is now greater than at any time
since Imperial plutocratic Rome.”
The Durants argued that throughout
history gross concentrations of wealth
haven’t proved politically durable.
ADAM CREIGHTON is Economics Correspondent at
The Australian in Sydney. He has written for The
Economist, The Spectator and studied economics at
the Universities of New South Wales and Oxford.
“A slump is near
China shifts from
pointing out that investors continue
to lend to even heavily-indebted
governments at very low rates.
If the US Federal Reserve is starting
to win plaudits, the jury is still out on
“Abenomics”, the name given to the
extreme monetary and fiscal medicine
Japan’s Abe government hopes will
revive a moribund economy.
“ There’s a limit to how much you
can stimulate when government debt
is already 200% of GDP,” says Leigh,
noting much is still riding on the
Abe government’s “third arrow” of
How will Australia and New Zealand
fare? The two countries, so similar in
history, had very different outlooks in the
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