. . . IMF Edition
If unsolicited advice is a sign of affection, then the IMF really loves the UK—how else to explain its laundry list of suggestions on how to shake the British economy’s recent funk?
We suspect Chancellor George Osborne was a touch perplexed upon reading the IMF’s recommendations, considering many run counter to his fiscal strategy. Since he became finance minister in 2010, he’s focused on cutting debt, spending and Britain’s large public sector, all in an effort to shore up government finances and make it easier for private firms to compete. But it can take time for resurgent private demand to offset falling public-sector activity, which is partly responsible for the UK’s (thus far) shallow recession.
Now, if the UK’s not growing again come September, the IMF suggests (among other things) the government buy mortgage and corporate debt, shift the tax burden from consumers to homeowners and boost infrastructure spending by £30 billion. Which seems akin to suggesting they undo two years of progress for a bit of short-term pop.
No doubt the IMF’s intentions are grand—it wants a healthy, growing UK. But its prescription seems too short-term focused. What’s more, the UK has a relatively decent, long-term history of overall fine economic growth (i.e., the UK isn’t Greece)—with occasional contractions, which are normal and to be expected, though painful to live through. Perhaps the IMF should simply have said, “Keep calm and carry on.”
. . . Japanese Edition
Following positive news of Japanese growth last week, ratings agency Fitch announced it cut the country’s long-term credit rating Tuesday. Confusingly, the agency noted the downgrade didn’t imply debt service problems, but that it felt uncomfortable with the country’s public finances. Which raises the question: Why cut ratings if your view is Japan likely won’t have problems paying back its debt? Yields remain low and auctions have overall gone fine.
Equally perplexing to us was the OECD’s advice for Japan: Double the national consumption tax from 5% to 10% to help rein in debt—nearly the opposite of advice the IMF proffered the UK the same day. (Did they not think to coordinate?) While Japanese government debt is projected to hit 239% of GDP by the end of 2012, that level (and higher) hasn’t proven automatically problematic globally or historically. Runaway debt isn’t a goal, but what matters more is how affordable debt interest costs are—and for Japan, they remain plenty manageable (i.e., Japan isn’t Greece either). Moreover, as we’ve often said, tax something and you likely get less of it—thus, doubling the consumption tax might, in fact, compound Japan’s growing debt by stymieing consumption (and thereby, government revenues—which won’t help shrink debt).
. . . Euro Edition
Japan wasn’t the only recipient of the OECD’s advice. The OECD joined France and other EU officials calling for the creation of Eurobonds, which German Chancellor Angela Merkel staunchly opposes.
Eurobonds could be an additional source of funding for various member nations—hence the understandable attraction for the OECD. But they aren’t a magical panacea for what ails the periphery. Even with a potential new funding channel, struggling countries will still in all likelihood continue struggling absent significant reforms (like increasing the overall level of competitiveness).
Maybe Eurobonds incrementally stabilize the banking system some—certainly possible—but at this point, the ECB seems willing to backstop struggling banks across the eurozone. Merkel’s take is the existence of Eurobonds takes some of the pressure off nations that need a little goading. Whether Merkel tells the OECD to mind its own beeswax or eventually folds (no doubt, with some politicized kicking and screaming) remains to be seen.