Will the Global Economy Add Up?

CAMBRIDGE – This year has begun on a note of cautious optimism for the global economy. Europe is back from the brink. The United States did not fall over the fiscal cliff. Japan is moving to change its economic strategy, and China appears to be getting back on track.

Financial-market indices in the US, moreover, are near pre-crisis levels, and expected volatility is at multi-year lows. Major financial institutions are, for the most part, better capitalized than they have been in a long time. Balance sheets have been repaired, and many actors are awash with cash. While 2013 will not be a banner year, it may nonetheless come to be viewed as the first year of the post-crisis period.

To be sure, the political environment remains challenging almost everywhere. The US will face a trifecta of new fiscal hurdles – lack of legal authority to pay debt, no operating budget for the federal government, and the dreaded prospect of sequestration – before the end of March. Crucial elections lie ahead in Italy and Germany. China’s new government comes to power amid unprecedented levels of public concern about corruption and inappropriate enrichment of public officials. And it is not clear that Japan’s fractured politics will permit stable governance in the years ahead.

But there is the prospect of a virtuous circle in which economic improvement leads to less surly politics, in turn reducing uncertainty and boosting recovery further. So far, at least, the worst fears about the adverse political consequences of poor economic performance have not materialized – even in Greece. So my guess is that if nothing else goes terribly wrong, politics will not undo the global economy.