{"id":5437,"date":"2012-08-13T10:21:48","date_gmt":"2012-08-13T00:21:48","guid":{"rendered":"http:\/\/blogs.unsw.edu.au\/knowledgetoday\/?p=5437"},"modified":"2012-08-13T10:22:46","modified_gmt":"2012-08-13T00:22:46","slug":"europe","status":"publish","type":"post","link":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/blog\/2012\/08\/europe\/","title":{"rendered":"Europe: Are the problems deeper than we fully realise?"},"content":{"rendered":"<div>\n<p><strong>From the <a href=\"http:\/\/knowledgetoday.wharton.upenn.edu\/\">Knowledge@Wharton today\u00a0blog<\/a>.<\/strong><\/p>\n<p><em>Jon Huntsman, Jr., the former candidate for the Republican presidential nomination, says the ongoing European financial crisis is \u201cdeeper than we fully realize\u201d and that no\u00a0solution will work without injecting economic growth into the continent. He made the comments in an interview with Knowledge@Wharton during the recent <a href=\"http:\/\/www.whartonjakarta12.com\/jakarta12\/default.aspx\">Wharton Global Alumni Forum<\/a> in Jakarta. Huntsman also discusses lessons from the Asian financial crisis that might apply to Europe and his concerns about slow economic growth in the global economy. An edited transcript of the interview appears below.<\/em><\/p>\n<p><strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> How optimistic are you about the European business environment today, as compared to a year ago?<\/p>\n<p><strong>Jon Huntsman, Jr.:<\/strong> I\u2019m not at all optimistic. I think it\u2019s a lot deeper than we fully realize. You\u2019ve got sovereign debt problems that are on top of traditional banking problems, that are on top of serious growth problems. And you\u2019re not going to solve the former two until you figure out how to grow. And growth is not going to occur until such time as governments promulgate some pro-growth policies, which are a ways off.<\/p>\n<p>\u00a0So I would say this year probably is as bleak as we\u2019ve seen in a very long time. But we\u2019re going to have to figure out how deep the crisis is, and whether it\u2019s Greece, or Greece and Spain, Spain and Italy, the third- and fourth-largest economies of the eurozone \u2014 whether or not that impacts France, for example. What, in other words, the metastasis is ultimately. But I think we\u2019re a long way off from being able to make any real sense of it.<\/p>\n<p><iframe loading=\"lazy\" title=\"Europe: The Problems are &quot;Deeper than We Fully Realize&quot;\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/Qyi2xkIH1Yw?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe><\/p>\n<p><strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> You mention growth policies. Is that as opposed to the austerity policies that are going on now? How would you change the policies that are largely in effect right now?<\/p>\n<p><strong>\u00a0Huntsman:<\/strong> I think there has to be a sense of predictability going forward, from a regulatory standpoint, from a tax policy standpoint, and from an over the long-term austerity standpoint. It\u2019s one thing to have a certain out-of-kilter, debt-to-GDP ratio. But beyond that, what is your investment regime going to look like? Is it going to stay consistent and bankable, investable, for more than just a year? I think all these things are going to be terribly important to the investor community going forward. And with the unpredictable nature of where some of the economies are in the Eurozone, getting any of those longer term policies in place that will really give the sense of confidence to the investor community really is almost impossible.<\/p>\n<p><strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> So those are longer-term fixes that you think are necessary for a sound, fundamental change. But there\u2019s also a critical short-term problem. Are there any specific policies or changes in policy that you would recommend to help in, let\u2019s say, the next six to 18 months?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> How do you stimulate investment? You stimulate investment by creating an economy that is conducive to investment. Capital\u2019s a coward, let\u2019s face it. It\u2019s going to flee wherever it perceives there to be risk in the marketplace and find a safe haven. So how do you make your economy a safe haven? It\u2019s generally done by tax policy, by investment regimes that are improved, either through transparency or trade and investment facilitation measures. So all of those are things that can be looked at and implemented. But again, the market is going to say, \u201cThat may be a quick fix, and it may be something that I can\u2019t bank on longer term.\u201d I think that really is the problem in the eurozone right now \u2014 how do you promote enough in the way of confidence in your longer-term policy-making so that it isn\u2019t one regime overtaken by another a year or two from now that will come in with completely different policies. That\u2019s the fix that they\u2019re in.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> Even if you were able to have a strong pro-investment policy, and even if there were confidence that it was going to be there in the medium and long term, would businesses still invest, given the lack of demand on the part of consumers that is the case right now?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> That\u2019s another side of the equation, the whole demand side of the economy, and the high levels of unemployment, and the missed opportunities on the human capital side. So it\u2019s a serious, serious set of circumstances right now. I think we\u2019re years away from any kind of settling out or ultimately calming effect that would provide enough in the way of confidence and longer-term policy-making transparency, where investment is going to be attractive in any serious way.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> What features of the current crisis in Europe concern you the most right now?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> I\u2019d have to say the high levels of unemployment and the displacement on the social side. Because that leads to what I would consider to be unpredictable outcomes in terms of social unrest. It\u2019s one thing to deal with the economic side numbers that just aren\u2019t looking good. It\u2019s another to look at the social implications of high unemployment like we\u2019re seeing in Greece and Spain, and the unrest that this could very well trigger.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> Many people probably don\u2019t realize that in Spain and Greece the unemployment rate is (around) 25% \u2014 around the levels that the U.S. saw during the Great Depression, and for youth unemployment, it\u2019s above 50%. If you were in charge, is there anything you would do directly policy-wise to attack those specific problems?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> Far be it for me to advocate anything in Europe beyond which they\u2019re already looking at. But clearly, you\u2019ve got to attack debt. You\u2019ve got to figure out how to get your debt-to-GDP into some sort of manageable number that speaks to longer-term confidence. Then you\u2019ve got to attract investment. You\u2019ve got to have seed corn with which to build your economic base and change the fundamentals, and put people back to work. Investment isn\u2019t coming in until there\u2019s a clearer picture of where the economies are going longer term. Again, that gets right back to debt. With a higher debt-to-GDP ratio, the longer-term outlook is very, very bleak. So I think I would attack the debt side first, knowing full well that that could boost a little bit in the way of longer-term confidence, bringing in investment that could ultimately settle out the unemployment problem.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> Isn\u2019t that what they\u2019ve been doing? Decision-makers in Europe have advocated debt reduction, austerity and reducing budget deficits, which has made unemployment worse. Is there some way to avoid the short-term spikes in unemployment?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> I think you\u2019ve got a broader architectural overlay that is altogether problematic that we aren\u2019t talking about. And that is: What about the eurozone? What about the fiscal and monetary union? What about the euro? These are all issues beyond the individual economies that have to do with the regional architecture, that have got to be resolved. And many say today, \u201cWell, it was a failed start.\u201d It\u2019s okay to call it a failed start today, but what do you do about it?<\/p>\n<p>\u00a0So before you really start drilling down on the individual member states and some of their problems, you\u2019ve got to deal with the problem of Europe and what it means to be managed economically within a common market or a common framework that doesn\u2019t seem to be working out so well. So who do you call? Do you call Brussels? Do you call the nation\u2019s capital that you have queries about? You\u2019ve got the overlay of 27 countries in the EU, to say nothing of the 17-member eurozone, that each has bureaucrats in Brussels that handle the various aspects of economic trade and foreign policy. So it\u2019s a top-heavy system. It\u2019s really difficult to talk about how you bring back to life an individual nation-state when you\u2019ve got this architectural overlay that really is failing the region in a very serious way.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> One of the solutions that seems to be talked about very broadly is this idea of sharing fiscal responsibility, spreading it out, approaching it as more of a whole rather than in individual parts. What do you think of fiscal union?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> Well, to have a successful fiscal union, like the United States has a fiscal union, you have to have labor mobility, just to begin the conversation. I don\u2019t think Europe has anywhere near the labor mobility that you need to make it work. You\u2019ve got to have some recognition that the wealthier states are willing to somehow subsidize the weaker states. We do in the United States without really calling it that. But that\u2019s kind of how our system of subsidies out of Washington, taxation to Washington, and then payments back to the states really works.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> So in your opinion, for Europe to work, they should be doing that?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> Absolutely. And in order for all of this to work, you\u2019ve got to have a stronger political union to back everything up. It\u2019s as if you had a couple going out to be married, not yet finalized, yet you take out a joint checking account and you begin transacting business with all the uncertainty that this then entails. You can only go so far with a fiscal and monetary union without a strong political union to provide the cohesiveness. And that\u2019s where the cart has been put before the horse, so to speak.<\/p>\n<p>\u00a0And I\u2019m not sure, longer term, that a political union, the kind that would be necessary in terms of the innate inherent cohesiveness, is going to be there to support an economic or a fiscal union longer term.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> If they don\u2019t have the cooperation to achieve that, does that mean that the alternative is some kind of a two-tier system? You would end up with a two-speed system where largely northern Europe economies and maybe the periphery operate as a separate unit. Does it seem that you either go more towards this fiscal union, towards more cooperation, or you\u2019re going to end up being forced apart?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> I think that\u2019s exactly right. And I\u2019m not sure that a 70-year experiment \u2014 let\u2019s just take it from post-World War II, from the Bretton Woods period right through to the accords of the early 1990s, the Maastricht Treaty, and then take that through to today \u2014 I\u2019m not sure that the leaders of Europe are going to easily dismiss what has been the most important experiment economically and politically in Europe since World War II, and maybe in 100 or 200 years.<\/p>\n<p>\u00a0I think they will endeavor to make it work so that you don\u2019t end up with a two-tiered system. I think that\u2019s terribly problematic from a currency standpoint and from a trade and investment standpoint. But then they\u2019re going to have to deal with Greece. And in order to deal with Greece, so that they don\u2019t fall out of the eurozone, someone\u2019s going to have to back-stop the numbers. And there\u2019s only one country that can do that \u2014 Germany.<\/p>\n<p>\u00a0And then, in Germany, you have to conclude that what is an economic problem for most others becomes a political problem for Angela Merkel. She can\u2019t very well make the sale on the streets of Berlin when they say, \u201cWell, gee, in 2000, we were the problem economy, and we did what was needed to be done in the interim in terms of austerity, in terms of getting our balances back in working order. And you want us to do what? You want us to subsidize those who aren\u2019t willing to step up and embrace those difficult measures that are needed, as we did?\u201d That becomes politically untenable. And so that\u2019s kind of where we find ourselves today [with] an economic problem that fundamentally becomes a political problem for Germany, and a relative stalemate. The European Central Bank is trying to create a wall, a backstop, to the best of its ability, with certain member states playing a supporting role to insure that, trying to keep contagion from breaking out.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> Asia suffered a financial meltdown in the late 1990s and took certain measures to recover, relatively speaking, fairly quickly. Are there lesson from the Asian financial crisis that are relevant to Europe\u2019s current economic woes?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> Maybe some. The Asian crisis was followed by some serious austerity and getting their balances back in working order \u2014 very aggressively, I might add, to the point where, for example, the South Koreans were very angry at the IMF and the United States for the tough medicine that they advocated. But they got through it.<\/p>\n<p>\u00a0They probably got through it better because, relatively speaking, many affected were smaller economies. They\u2019re also newer economies. They didn\u2019t have as much drag in their systems as you find over in Europe. It\u2019s also a more buoyant region in terms of inter-Asian trade and investment flows. So to some extent, I think you could say they had imbalances. They addressed the imbalances. They took some really tough steps that were advocated by the IMF, the United States and others. And they got back in the game. But there were also some factors that would have made them a different set of circumstances in Europe.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> Probably the biggest being the fact that they could devalue their currency, which Greece cannot. For example, Thailand, which actually kicked off that crisis and probably suffered some of the worst effects \u2014 devalued by about 80% against the dollar. There\u2019s Greece, stuck, unable to do that.<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> Ramping up exports is a way of getting back on their feet again.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> China and India both helped to prevent the global financial crisis from becoming much worse. Now both are slowing down. So on top of the crisis in the eurozone, things seem to be going in a negative direction in a lot of regions. What do you see for the next year or so in the global economy, given where the momentum\u2019s heading?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> Well, you have to ask yourself the question, \u201cWhere are the engines of growth?\u201d The global economy has had, in recent years, some reliable engines of growth to pull those economies that were performing at lesser levels along. But you\u2019re hard pressed to see any engines of growth today. China will remain reasonably strong. They may not put in an 8% number or a 9%, but certainly probably a 7% or 7%-plus number, which is way down historically from where they\u2019ve been over the last 30 years. India\u2019s down probably by a factor of 30% to 40% in terms of their own growth numbers.<\/p>\n<p>\u00a0So where are the engines of growth? And I think that\u2019s bad news for the global economy. You may get by with 1.5%, maybe 2% [global economic growth] if you\u2019re lucky, waiting for the traditional engines of growth to re-fire themselves and get moving again. But I think the next year or two are going to be very tough for the global economy. I think that a lot of it will depend on how quickly the United States gets back in the game.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> Not that the folks in Western economies are in a good position to give advice to Asia, but if you were going to suggest some policy changes for Asia, let\u2019s say for China or India, what might they do?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> I would say streamline investment regimes, introduce greater transparency into the system, open financial services markets, insurance markets, do a better job protecting intellectual property rights, and quit manipulating your currency to the extent that you do.<\/p>\n<p>\u00a0These are all probably steps that would enhance the prospects of both countries, China and India, longer- term. They\u2019re hard to do, particularly during periods of uncertainty, when your export markets are less reliant today than they were just a few short months ago, even. You\u2019re going to think inward. And you\u2019re going to resort more to protectionist measures. You\u2019re going to be more inclined to manipulate your currency and to keep closed some of those markets that, even under WTO agreements, you agreed to open at some point. So we\u2019re at an important time in terms of whether or not some of the newer emerging economies are really willing to step up and show their commitment to growth and to reform and to economic openness.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> So one might expect you can look forward probably to increasing trade frictions as a result of the slowing global economy in general?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> That generally follows.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> And what do you think the odds are that China will try to rebalance its economy somewhat, as many people say is the way for them to get to the next level, to a more consumer-oriented economy, as opposed to export-led?<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> Well, the evidence is there that they\u2019re in that transition, to some degree. When they announce stimulus measures as they did about three weeks ago to incentivize consumers to buy more in the way of household appliances, televisions, big screens, consumer goods you know they\u2019re taking this transition seriously. And they have to, because the math just doesn\u2019t work for them any other way. You can\u2019t maintain their current trajectory as just an export power and expect to deal with the demographic changes that lie on the horizon.<\/p>\n<p>\u00a0When you\u2019ve got more people leaving the workforce than you have entering the workforce, your costs are going to increase. And labor rates, indeed, in the southern manufacturing zones around Guangdong and beyond were seeing prices escalate. I think that\u2019s because of the upside-down demographics that China is just on the front end of experiencing. So you\u2019ve got longer-term four grandparents, two parents, one wage earner. You\u2019ve got an upside-down pyramid, essentially. How do you make the numbers work longer term? And how do you deal with health care costs and Social Security costs, and affordable housing costs when you\u2019ve got real estate bubbles every now and again? They want certainty, which is tough to achieve once you\u2019ve started that transition from an export-led economy to more of a consumption economy. But they\u2019ve taken that risk.<\/p>\n<p>\u00a0<strong><a href=\"mailto:Knowledge@Wharton\">Knowledge@Wharton<\/a>:<\/strong> It sounds as if you see them as having a reasonable amount of flexibility, which maybe wasn\u2019t there a couple of years ago.<\/p>\n<p>\u00a0<strong>Huntsman:<\/strong> Flexibility is driven by necessity, because they can\u2019t go back to their old form of managing the economy and expect to survive longer-term. They\u2019re in uncharted territory right now. But that\u2019s also by necessity.<\/p>\n<p>This blog was previously posted in Knowledge@Wharton today blog: <a title=\"Permalink to Jon Huntsman, Jr. on Europe: The Problems Are \u2018Deeper Than We Fully Realize\u2019\" rel=\"bookmark\" href=\"http:\/\/knowledgetoday.wharton.upenn.edu\/2012\/08\/jon-huntsman-jr-on-europe-the-problems-are-deeper-than-we-fully-realize\/\">Jon Huntsman, Jr. on Europe: The Problems Are \u2018Deeper Than We Fully Realize\u2019<\/a><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>From the Knowledge@Wharton today\u00a0blog. Jon Huntsman, Jr., the former candidate for the Republican presidential nomination, says the ongoing European financial crisis is \u201cdeeper than we fully realize\u201d and that no\u00a0solution will work without injecting economic growth into the continent. He made the comments in an interview with Knowledge@Wharton during the recent Wharton Global Alumni Forum [&hellip;]<\/p>\n","protected":false},"author":336,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-5437","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/5437","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/users\/336"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/comments?post=5437"}],"version-history":[{"count":2,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/5437\/revisions"}],"predecessor-version":[{"id":5439,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/posts\/5437\/revisions\/5439"}],"wp:attachment":[{"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/media?parent=5437"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/categories?post=5437"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.unsw.edu.au\/BTOpinion\/wp-json\/wp\/v2\/tags?post=5437"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}