The Politics Of Recovery
Todd Millay is Managing Director of Choate Investment Advisors in Boston, an independent investment advisory firm that manages over $4 billion in assets for high net worth individuals and families.
A "politicized" global economy is one legacy of the 2008-09 financial crisis that brought large scale, direct governments interventions in the financial markets. From China to the U.S., governments took dramatic action to stop the panic and transfer bad debt from the private to the public sector. Yet, this "fusion" of politics and economics has caused many of the most important "aftershocks" of the crisis.
The ongoing negotiations in the Eurozone offer the most obvious example of economic politicization. Greek voters brought Syriza to power on the promise that they would end austerity but keep Greece in the Euro. As negotiations dragged into the summer, it became clear that key Eurozone lenders had little appetite for Syriza's proposals thanks to their own domestic political considerations. After the Syriza leadership put a potential third bailout deal to a referendum vote – and urged the Greek people to vote against it – the reality was many voters had little understanding of the proposed deal, which had already expired prior to the vote.
Although a solid majority of Greeks voted "oxi" (no), the creditor nations were unbending, pointing out that the democratic will of one Eurozone country should not override the concerns of elected leaders in other democracies. Indeed, some of the fiercest resistance to Syriza's proposals came from fellow debtor nations like Spain, whose leadership did not wish to empower leftist movements in their own countries. Now Greece, the cradle of democracy, has seen its invention backfire. The Greek Parliament is in the midst of voting in an even harsher austerity package than was originally on the table.
What can other countries learn from this? First, it costs little for politicians to make economic promises that they cannot keep, and voters often do not fully understand the implications of the policies that their leaders propose. The reason that monetary policy – one of the most technical areas of economic policy – is almost universally placed in the hands of unelected central bankers who are insulated from political suasion is because it is extremely tempting to politicians seeking to curry favor with voters.
Second, there is danger in "moralizing" economic policy. Because the dynamics of economic policy are complex and sometimes counterintuitive, it is tempting to substitute inflammatory rhetoric for nuanced debate. Rhetoric like "the Greeks are irresponsible" plays on stereotypes and typically casts borrowers in an unfavorable light relative to creditors. The truth is every creditor needs a borrower, and irresponsible lending is also blameworthy – particularly when the lender is sophisticated and the borrower is not (as with U.S. subprime mortgages).
Third, economic arrangements must be founded upon trust. The erosion of trust often happens the same way that Ernest Hemingway described going broke, "gradually, then suddenly." The Eurozone project has never been purely an economic arrangement. It is an expression of shared ambition to forge a larger European identity based on shared ideals, and to overcome centuries of destructive conflict on the continent. The citizens of Greece and other countries have endured a staggering amount of economic hardship for the sake of "belonging" to Europe. One of the most destructive aspects of the recent Eurozone negotiations was that it devolved into a narrow discussion of economic self-interest.
More Turbulence Ahead in China
In less democratic or non-democratic countries, this trust issue is even more important. For example, China's unelected government has derived much of its legitimacy from the economic growth it has delivered to its people. In the immediate aftermath of the financial crisis, China's model seemed compelling, as their government responded resolutely while western democracies debated, delayed, and compromised. But the U.S. and more democratic markets have dramatically outperformed China and other less democratic countries (particularly Russia) since 2008. This year, China has experienced a massive bubble and crash in its equity markets, along with ineffective government interventions to support equity prices.
While the Eurozone's current politicized economy is certainly dramatic, China will ultimately matter more as it attempts to transition from an investment and export dependent economy to a consumer-focused economy sustained by its growing middle class. South Korea, Japan, and Taiwan have all successfully transformed from undemocratic state-controlled economies to vibrant, democratic nations with a robust middle class. But China is on a vastly larger scale, and the authorities reaction to the recent stock market crash may damage people's faith in their leaders' economic policies.
As China seeks to reform its economy, it has also adopted a more aggressive foreign policy, particularly with regard to its territorial claims in the South China Sea. As economic growth slows, the Communist Party appears to be appealing for legitimacy as a defender of China's national interests and prestige. China's continued economic success is important not just for the well-being of its people but for global security.
As China continues to grapple with the volatility of its stock market, it is unfortunate that Chinese media has blamed foreign investors for destabilizing the market. Investors should expect ongoing turbulence as China wrestles with the contradictions of transitioning to a free market controlled by politicians without a democratic mandate.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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