The Year of Dangerously is a film directed by Peter Weir with Mel Gibson and Sigourney Weaver in the starring roles. It is set in Indonesia on the eve of the attempted coup against the government of President Sukarno in late 1965. The film focuses on a group of international journalists as they try to make sense of the impending political crisis. 1965 was also the year that the US committed half a million troops in order to end the war in Vietnam. What journalists make of the baffling economic and political events that are unfolding in 2012 is anybody’s guess.
Are there lessons to be drawn from the events in East Asia nearly 50 years ago as one of its largest nations became subject to political suppression, violence and ensuing economic instability? At the end of shortest month of the year, the question arises of whether 2012 is likely to be the longest year for the global economy as a catenation of events creates a heady brew that could overwhelm us all? Professor Michael Klare of Hampshire College in the US makes a comprehensive case in his recent blog Welcome to the Year of Living Dangerously that covers potential food and energy crises in the context of increased geo-political threats.
This year will see presidential and parliamentary elections in the US, Russia, France, Greece, Hungary and Finland, among others, with Germany and Italy following suit in 2013. Overhanging these contests is the question of whether there will be sufficient economic recovery, particularly in the eurozone. The World Bank’s view of prospects for the global economy suggest:
- The global economy is now expected to expand 2.5 and 3.1 percent in 2012 and 2013;
- High-income country growth is now expected to come in at 1.4 percent in 2012 (-0.3 percent for Euro Area countries, and 2.1 percent for the remainder);
- Developing country growth has been revised down to 5.4 and 6 percent;
- Reflecting the growth slowdown, world trade, which expanded by an estimated 6.6 percent in 2011, will grow only 4.7 percent in 2012, before strengthening to 6.8 percent in 2013.
“However, even achieving these much weaker out-turns is very uncertain. The downturn in Europe and the slow growth in developing countries could reinforce one another more than is anticipated in the baseline scenario, resulting in even weaker out-turns and further complicating efforts to restore market confidence……Additional risks to the outlook include the possibility that political tensions in the Middle East and North Africa disrupt oil supply, and the possibility of a hard landing in one or more important middle-income countries”. (World Bank, Global Economic Prospects, January 2012 Uncertainties and Vulnerabilities).
The graphic below shows the quarterly percentage change in world industrial production (IP). It does not make comfortable reading for those who claim that the emerging markets will provide the stimulus to growth. As can be seen, it is China that has been supporting world IP but there are now mixed signals coming from analysts who have shifted their position of being “bulls” (continuing significant growth rates) to being “bears” (faltering growth and stronger inflationary pressures).
The bulls suggest an annualised growth rate of 9.6% between 2012 and 2016, whilst the bears suggest a figure of 3.9%, with a base case of 6.9%. The lowest case is predicated on domestic and international factors. In the former case, the danger of bankruptcy of property developers, as real estate sales fall, is putting pressure on the banking system, already beset by solvency and liquidity issues. The rise in nominal wages has made the export sector less competitive in the face of continuing weak global demand. Inflationary pressures are impacting on consumer demand as household real incomes are constrained.
The eurozone crisis is impacting on the export sector by affecting demand in the whole global economy. Cumulative debt defaults in the eurozone could lead to a hard landing for China in 2012 and 2013. Martin Wolf in a recent Financial Times article pointed to the potential risk of the next global financial crisis starting in China unless its economy starts to re-balance, including the full international convertibility of the renminbi.
The jobs and housing sales data in the US suggest that its economy may be edging towards recovery, although the unemployment rate appears to be sticking at 8.5%. Although growth increased by 2.7% in the last quarter of 2011, fiscal tightening of the equivalent of 11/2% of GDP is expected to limit growth to below 2% in 2012, with an upside forecast of 2.7% for 2013. But, again the downside risk to these forecast outcomes depends on whether the global economy can get “Beyond Thunderome”, a place that the eurozone seems to be heading towards.
Thunderdrome is a gladiatorial arena where conflicts are resolved by a duel to the death, portrayed in another Mel Gibson film, Mad Max :Beyond Thunderome. This arena is located in Bartertown whose electricity is generated by methane generators: a resource fiercely defended against outsiders existing in a post-apocalyptic Australia. Anyone could be forgiven for viewing the eurozone as increasingly like Thunderdrome, in which Greek and other EU leaders and officials from the Troika of the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission (EC) slug it out to the death.
There is also another fictional parallel in the relationship between the EU’s core and its periphery that is from Emile Zola’s novel La Débâcle, which portrays events during the Franco-Prussian War of 1870. The novel centres on circumstances in and around the Battle of Sedan during which the Prussian army surrounded the French one, ultimately leading to France’s defeat. Zola describes in detail how the black uniformed enemy troops swarm over the French lines like an army of ants.
The population of Greece can be forgiven for thinking that the Battle of Sedan is being metaphorically played out as proposals for German officials to swarm over the budgetary arrangements of the Greek government, as part of the conditions for continuing to support the fiscal bail-out deal. Moreover, the German fixation with fiscal rectitude can be directly traced back to its history in the C19th and C20th century. Yet its proposals for an EU-wide fiscal compact that will constitutionalise public debt ceilings in all Members States reinforces the deflationary bias of the existing fiscal rules introduced by the Maastricht Treaty. The net result is that even if there is an upswing in the economic growth cycle, any downturn will be amplified resulting in greater volatility.
The year 1870 was one of living dangerously for the France of Napolean III and the Second Republic as its sovereignty collapsed under military defeat. If the EU, facing a negative growth rate, continues to pursue its austerity the outcomes are potentially dangerous for all the world’s citizens. Ironically, the head of one of the Troika, Christine Lagarde, surprisingly abetted by some of the credit rating agencies, is stating that the austerity path in itself will not lead to renewed growth. In the unlikely event of Mario Draghi, the President of the ECB, turning into some kind of economic Mad Max, 2012 and beyond will be the years of living dangerously for the world economy as its own Bartertown starts to crumble.