To the PointDiscussion on the economy, by the Chief Economist September 28, 2012 Wanted! Political leadership! In order for the currency union to survive, it is crucial to strengthen the political leadership in the euro area, as well as in the EU. Also in the US, Japan, the WTO, and the UN, the leadership deficit is noticeable. The question is: Are the leaders weaker than normal, or are the tasks more challenging than ever? Leadership is tested in hard times – like in the euro area The crisis in the euro area is most often discussed in an economic context. The obvious reason is that the crisis has many economic consequences, such as recession Cecilia Hermansson and financial turbulence. Many of the terms used are economic or financial, such as Group Chief Economist the default risk, deleveraging, etc. Economic Research Department However, the origin and solutions of the crisis have more to do with political science +46-8-5859 7720 than economics. What the euro area lacks are the institutions needed to stabilise the email@example.com economy and manage the banking and public debt crises stemming from weak competitiveness and budget discipline in many of the member states. For example, the demands from the European Central Bank (ECB) that the prime ministers and finance ministers create a fiscal compact show how unclear the division of responsibility is and how big the institutional gap is. It has been impossible to develop the ECB into a lender of last resort--not only to banks, but also to member states--without a political framework that hinders moral hazard. Furthermore, the vision to deepen integration in the euro area (in banking, fiscal issues, economic policy, and the political arena) requires good leadership because the challenges are great. No region has ever created such a project before. While leaders need to keep the ball moving and take decisions that are credible to the financial markets, investors, and other actors, there is a need to carry out the reforms in a democratic spirit. How to persuade both the populations and politicians on the national level that power should be moved to a supranational level is difficult, not least since the ones doing the moving also have to take into account national considerations in order to get re-elected as leaders. Did we have stronger leaders before, or are the challenges greater now? Both factors seem important. Leadership theories, such as that of the “Great Man” born as a leader, like Winston Churchill, worked better in old times; meanwhile, modern leadership theories such as “participative” or “relational” work better today, when leaders take into account input from voters, or find good relations between “leaders” and “followers.” This means that, today, cooperation and networking is more appreciated; in practice, this may mean weaker leaders, at least as seen from the outside. It was probably easier in the 1980s for Helmut Kohl and Francois Mitterand to propose an economic, monetary, and political union, than for today’s leaders to actually implement it. The visions were there, and perhaps also the trust between Germany and France at that time. Today, Germany’s Angela Merkel cannot totally trust France’s Francois Hollande, as he has not been totally transparent during his election campaign on the need for budget consolidation. Or else he is not really committed to carrying out the reforms that are necessary in France, including making the labour market more flexible in line with the reforms taking place in southern Europe. It is crucial for Angela Merkel to have France as a strong co-partner in their common task of saving the euro. This is not yet so, and it makes it more difficult for her to defend the euro project in front of her voters. The dysfunctional relationship at present between Germany and France endangers the euro; it is also the main reason for the slow, step-by-step process of crisis management that has worsened the crisis and made it both longer and more costly. No. 9 Another example of poor leadership is when ministers in Sweden, Finland, Latvia, and Austria from time to time, communicate their projections for when Greece will 2012 09 28 leave the euro area. This will certainly not help the EMU, and could instead start a more negative process, not least since political developments are difficult to predict.
To the Point (continued)September 28, 2012 Leaders seem to prefer bilateral to multilateralChart 1: Euro against the US dollar In the euro area, the crisis is driving the process of deeper integration and the 1,6 creation of a stronger supranational level, while reducing power at the national level. At the same time, there is a global trend to move from multilateral trade 1,5 agreements to bilateral agreements, which will hurt globalisation and potentially 1,4 worsen the outlook for weaker/poorer economies. The leadership at the WTO wasEUR/USD 1,3 probably stronger a few years ago than what we can see today. The US and also 1,2 China are key nations driving world trade towards bilateralism, and they seem less 1,1 interested in seeing strong leaders running the WTO. 1,0 The same applies to the UN system. As former Secretary-General Kofi Annan 0,9 became too strong in relation to the strong nations, an interest in placing someone 0,8 else in that position arose. Thus, Ban Ki-Moon was elected as a compromise 99 00 01 02 03 04 05 06 07 08 09 10 11 12 candidate. As a result, the UN has become a weaker institution in a time when it is needed the most due to the many multilateral challenges, such as the climate threat, mean Source: Reuters EcoWin civil wars in the Middle East, and potential wars between China and other nations in Asia, like Japan and the Philippines. A similar practice of electing weak leaders is also noticeable in the EU. The larger nations could not agree on a candidate for the first full-time President of the European Council, and, instead of choosing a strong leader, the little-known Belgian politician Herman van Rompuy was elected. The same applies to Catherine Ashtons selection as the EU:s first “Foreign Minister.” In the euro area, 17 nations need to agree on how to build a currency union so that it is credible and sustainable. It is understandably difficult to balance the views of all parties concerned. In the US, there are problems agreeing on fiscal policy between two parties, the Republican and the Democratic. The gridlock between them has been present for quite some time now. One of the main issues is not only the lack of leadership, but also of followership. There is a large risk in compromising, since it can spoil a congresspersons chances of being re-elected. Also in Japan, there has been a deficit in political leadership for many years. The gap between voters and the government seems especially large, and perhaps also a more modern style of leadership is needed that could create opportunities for the younger populations. The challenge is great also in Japan, on how to ease the public debt burden while facing the reality of a shrinking population. It is much easier being a political leader with the task of (re)distributing growth when there is growth, rather than in times of recession. For leaders during the 1950s and 1960s, economies were strong, and public expenditures and taxes were low and could be raised. In the 1980s and 1990s, there was great moderation, i.e. stable high growth and low inflation. Today, the buzz word is austerity, and the effect is recession. With more transparency, accountability, and rule of law than in earlier times, leaders need to do the right thing and communicate it well. Confidence is created through either the political or the central bank channel, and creating this confidence could make a difference if a country runs into recession or faces stagnation in the years to come. Even if the challenges are greater today, and leadership theories call for someone other than a “Great Man” or “Great Woman,” , leaders can do a better job than we have seen in the last few years. To cooperate better could make the difference for France and Germany. To work for multilateral agreements and globalisation is also key. Clearly, there is a potential for leaders to stand up for common goals. Saving the euro is one! Cecilia Hermansson Economic Research Department To the Point is published as a service to our customers. We believe that we have used reliable SE-105 34 Stockholm, Sweden sources and methods in the preparation of the analyses reported in this publication. However, we Telephone +46-8-5859 1000 cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any firstname.lastname@example.org error or omission in the underlying material or its use. Readers are encouraged to base any www.swedbank.com (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages, direct or indirect, owing to any errors or omissions in To the Legally responsible publishers Point. Cecilia Hermansson +46-8-5859 7720 2