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The Hazard of Second Best

Apr 2, 2012 Mohamed A. El-Erian

The international community appears increasingly intent on settling for second best on two key issues to be discussed this month at global meetings in Washington, DC: the lingering (if currently dormant) European debt crisis, and the selection of the World Bank’s next president. It is not too late to change course.

NEWPORT BEACH – The international community risks settling for second best on two key issues to be discussed this month at global meetings in Washington, DC: the lingering (if currently somewhat dormant) European debt crisis, and the selection of the World Bank’s next president. It is not too late to change course, but doing so will require the United States and governments in Europe to resist harmful habits, and emerging countries to follow up effectively on recent initiatives.

In the last few days, European leaders, including French President Nicolas Sarkozy and European Central Bank President Mario Draghi, have declared that the worst of the eurozone crisis is over. Others, like French Finance Minister Francois Baroin, have gone even further, claiming that Europe “has done its part,” and that it is now up to other countries to do theirs.

These announcements should come as no surprise. Having experienced prolonged turmoil, the eurozone is currently in a period of relative tranquility. The courageous reform measures implemented by Mario Monti, Italy’s technocratic prime minister, have eased immediate concerns that Greek dislocations might tip other European countries – much bigger and harder to rescue – into insolvency. Europe’s decision last week to bolster its internal financial firewalls has reinforced the resulting positive impact on market sentiment.

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Mohamed A. El-Erian

Writing for PS since 2010
102 Commentaries

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers in 2009, 2010, 2011, and 2012. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

0 Comments on this paragraph, 4 in all 4 Comments on this article

Jonathan Lam Apr 10, 2012

Gamesmith94134: The Hazard of Second Best

French Finance Minister Francois Baroin, have gone even further, claiming that Europe “has done its part,” and that it is now up to other countries to do theirs.

What would Mr. Baroin expected in the outcome of the stronger Euro at 1.3 to a dollar? Since it sound relevant to the strength of its Euros, it is the first haircut to foreigners’ currencies under the 1% bank loan credits. Does your investment lose itself through the processes of fiat Euros? Perhaps, Mr. Baroin knew the stock is coming to an adjustment, then, the other countries should dump the Stock and buy their bonds and compress 50—75% off their investment since ECB and IMF from getting their 2 trillion equity or credits for salvage the EU debts.

Some are disgust at the déjà vu again, it is not even July; but some may reminiscent of “October” as EFSF failed to aggregate a targeted capacity again. Just after the sale in Spain’s debt failed its target sum, and Greece future is bleak, so is the PIIGS. The ECB also said the interest rate on its deposit facility would remain at 0.25 percent, and the rate on the marginal lending facility would stay at 1.75 percent. The market reacted in the credit crunch that the Dow Jones in sliding off 13000 after China stocks cut 3% to apply in its financial lookouts.

There is a crack in the dollar at 76 to 79 the jump in Dow Jones by 20% after the 9600. Swiss banks are forced to purchase its bonds because their overloads of Euros currency that included debts and credits, some said of CDS tradeoff. I do not blame them if I saw yahoo cut 2000 employments, Best buy closed 1500 stores, Sears closed 150 stores that many may see as correction to globalization. In addition, the Brazil is not bending on the inflow of US to more acquisition and merger, and BRICS is raising its criticism on the equitable currency exchange under the throw weight system of IMF. It is plainly disadvantage to their floating rate when EU and FED margin its free flow of credits at 1-1.75%.

In the last days on the Greek debts interest rate jumped and Spain’s debt came short in sale. More and more investors are questioning on the downturn on the Stock markets that I believe the credit crunch resurface in the EU banks which suffered from the contraction of the China’s growth at 7.5% from 9%, and overshadowed by its trade deficit from January; in addition, the currencies exchanges rates are shifting their compatibilities after the effects of protectionism and inflation roaming.

Consequently, dumping of Euros is inevitable even if those debts are traded. However, the extended additional debts make the system worse than before the Bael II with lesser growth.

Some would question if EU and US could have their 54% votes to the World Bank in choosing its chief; and BRICS demanded the recalculation of the current currency exchange rate, and ASEAN have already developing its own mutual agreement in its 13 currencies to a standardize exchange. Somehow, IMF should find it way to correct its system to compensate when imbalance occurs as fixed rate and floating rate meets. How its system compensate when 1.75% and 7% interest rate is being exchanged? Otherwise, the wall of protectionism is not going away.

I see more of significant equitable value changes in US and EU even in Germany after more inflation hit and lesser growth in a downward trend after June if the haircut is not reversing the debt and GDP. What else can the developing nations do if their accomplishment is not apt to those are floating with a weight fixed to their central banks? It may not be contagion but sinking to the bottom for depression to a new start is not other countries have in their mind.

Mr. Mohamed A. El-Erian gave the best descriptions on Europe’s decision last week to bolster its internal financial firewalls, these steps are, the recent tranquility has been more borrowed than earned.

May the Buddha bless you?
Caitlin Luview Apr 5, 2012

It is interesting that in the concluding paragraph, the author, perhaps unknowingly, points to both the overall problem and thus by reference, to its solution.

"...opt for the first best. But this will happen only if emerging countries play their cards well, and if Europe and the US do what is in their own best longer-term interests, as well as those of the global economy."

The problem is that Europe and the US are currently incapable of doing what is best both for themselves and the global economy, because these two positions are currently opposites, making them mutually exclusive, rather than mutually inclusive. Is what is best for Europe the same as what is best for America? Is what is best for America the same as what is best for Europe? In an egoistic system, the answer to both questions is NO. In a system of mutual reciprocity, altruism, the answer to both questions is YES.

Until we all come together in one great common family of humanity, we will continue to have attitudes from the habits of the old system of egoism, rather than the system of nature that we are evolving into, which requires altruism, compassion, and mutually reciprocal agreements in responsibility to do the best possible good for others, and in that, every best possible good for everyone is served, grown, and nurtured to ultimate flourishing.

As long as there is any individual nation's leadership expressing this kind of isolationist "me, me, me" attitude, "claiming that Europe 'has done its part,' and that it is now up to other countries to do theirs," the unity for the best beneficial good of everyone that is now required in our globalized integral world, is still in the distance, keeping us all in jeopardy.

I really like and completely agree with what the commenter Zsolt Hermann has said above: "No superficial adjustments can help, only a total rethink, and rebuilding of the whole global, interconnected socio-economic human system. The World Bank itself, while important is really a side issue, just another financial institution in the hands of the top layers for their own subjective, self calculating games. It does not matter who is heading these institutions until the whole attitude, foundation changes."
Zsolt Hermann Apr 5, 2012

The main problem in Europe is not only that we delude ourselves with the temporary recovery that was clearly borrowed and not earned.
The main problem is that we judge everything, crisis or recovery by the state of the financial institutions.
But the state of the financial institutions tell us nothing about the true state of the nations, how the general population is doing, whether they can cope with the austerity measures, whether they can sustain themselves according to accepted standards, whether the unemployment is easing at all, especially in the younger generations, and so on.
We know it by know that the present measurements tell us nothing about the steadily growing inequality in between the top and lower layers of society and we can see world wide that all the bail out, stimulus packages, tax changes are aimed at making the strong stronger and the weak weaker.
This predictable reflex reaction simply worsens the situation, since our whole socio-economic model is based on the population consuming what the top layers brainwash them to buy, but as the consumers are disappearing from the horizon, the already faltering machinery completely collapses. At the end everybody will be on the losing side.
No superficial adjustments can help, only a total rethink, and rebuilding of the whole global, interconnected socio-economic human system.
The World Bank itself, while important is really a side issue, just another financial institutions in the hands of the top layers for their own subjective, self calculating games. It does not matter who is heading these institutions until the whole attitude, foundation changes.
Procyon Mukherjee Apr 2, 2012

One would be pleasantly surprised at the phrase ‘relative tranquility’ to be applied to a league of nations as mired by current controversy as the EU when the economics of Central Bank sops have under-performed dramatically against the rising needs of a whopping majority of members as growth rates have almost stalled; the long term cost of these sops at negative real interest rates is only a confirmatory signal of more disorder, not less. To pass on the burden to some of the emerging economies through a craftiness as vividly described is condemnable at the least.

Procyon Mukherjee