As European governments slowly manage to contain COVID-19 and economies start to reopen, the damage becomes clearer. With Germany’s economy shrinking by an annualized 7.2%, and 10 million workers furloughed, the government has made decisive use of its fiscal power. Unveiled stimulus spending now totals around 1.3 trillion Euros. Yes, you read that right: TRILLION. This means that Germany’s stimulus packages represent both around a third of its pre-pandemic GDP and a U-turn in economic policy.
During 2008’s recession, officials warned of “crass Keynesianism” and even wrote an article discouraging deficit spending in the constitution. It even went so far as to insist that other countries receiving aid adopted harsh austerity measures, which is seen as a decisive factor in Southern Europe’s weak recovery.
However, there is a problem. As a consequence of a combination of high debt and low growth, many European countries can simply not afford stimulus matching this crisis. This means that Germany while representing around a fourth of the EU’s GDP accounts for around half the stimulus paid between all members.
Many commenters have expressed concern that this mismatch might endanger the European single market. Imagine you are a tube-producer in Spain that can’t pay its bill and a German competitor grabs your market share as you downsize. This is an unfair advantage stemming from the free movement of goods and services across EU borders paired with strongly diverging state aid in member countries.
In order to offset this inequality, the EU commission has proposed a 750 Billion Euro stimulus package, involving 500 billion in much-needed grants.
They are intended to be a de-facto transfer of funds from richer to poorer countries, which will translate to more even state support across the EU.
As anti-European sentiments are again rising, it is crucial that EU members, especially Germany and the Netherlands ensure that all members recover in a synchronized manner. Otherwise, the European single market, which is a major contributor to both countries’ wealth risks being torn apart.
Latin America is often thought off as the next place to be. They have the size, the natural resources and decently well-established institutions; the perfect recipe to become the next economic powerhouse. And yet, they never really live up to those expectations. In 2019, Latin America grew a mediocre 0.1% and it was slated to grow only 1.4% in 2020, that was before the pandemic became an issue. So, what is really going on? Many believe that Latin America is stuck in the middle-income trap. This refers to the phenomenon in which a developing nation stops growing because it becomes too rich (and expensive) to manufacture on, but too poor to transform into a developed service-based economy. The middle-income trap is a real problem; however, it is far from a death sentence. For example, in 1985, Mexico was wealthier on a GDP per capita basis than South Korea. Today, South Koreans enjoy a GDP per capita of $31 thousand, whilst Mexico’s sits at $10 thousand. So, there must be something else going on.
The most common theme that can be seen is undoubtedly corruption. Latin America’s institutions are not as weak and underdeveloped as that of Africa’s for example. Nevertheless, they seem to have internalized and institutionalized corruption whilst they developed. This was somewhat exposed in the Odebrecht case, which gave us a glimpse at the extent of corruption in the continent. Moreover, looking at the World Justice Project’s Rule of Law index, where 6 and above is considered a ‘passing grade’, only 3 countries, namely, Uruguay, Chile and Costa Rica, are above that threshold. Unsurprisingly, these three are also amongst the wealthiest nations in the region. Conversely, embattled Venezuela, scores the lowest in the world, no surprise there.
Whilst corruption is likely to be a major force in keeping the region stagnant, each country faces a major issue of its own. Mexico for example, still can’t get a grip over its massive drug cartels. The Sinaloa cartel, the largest and most powerful in the globe, recently humiliated the Mexican army by forcing them to release the son of ‘El Chapo’. Moreover, the issue of crony capitalism is still rampant in the government as the country’s wealthiest businessmen cosy up to government officials. These problems are on top of the left-wing populist government’s problematic and counter-productive measures. Which all combined explain why South Korea has left Mexico far behind. Further south, Argentina’s new president couldn’t even last one full term before driving the country into default for the 9th time. Venezuela on the other hand, seems to be making little progress in pushing out the narco-state imposed by the socialist dictator, Nicolas Maduro.
Even in Latin America’s most promising economies, problems are on the horizon. Chile, the wealthiest nation in the region, the only one whose ranking in economic freedom is above that of the United States, seems to have fallen into disarray. Riots erupted in 2019, which have since caused over $2 Billion in damages; the long-term impacts may be even more costly. Peru, a world leader in mining, was performing well until the price of metals begun to decline. Moreover, over 70% of the country’s workforce is said to be involved in some form, with the country’s massive shadow economy. Even so, their biggest issues seem to be political. Most of the country’s ex-presidents have been indicted, and the current (unelected) president, Martin Vizcarra, seems to enjoy using the justice system to prosecute his political opponents and hand out favours to his friends. He also recently dissolved congress (some say in violation of the constitution).
Finally, Brazil and Colombia. These two countries seem to be going in a somewhat more promising trajectory. On the Brazilian front, the country’s controversial right-wing president, Jair Bolsonaro, seems to have the right idea when it comes to liberalizing the country’s stagnating economy. However, progress has been slow, and he seems to have lost some support; we will have to wait and see what the remaining years of his presidency bring about. Colombia on the other hand, has managed to finally reign in on their narco-guerrillas and cartels, bringing about much needed peace and stability for the country. Moreover, the country has one of the freest economies in the region and this has been improving. However, once again, progress is slow and liberalizing the economy does not seems to be a top priority for the government.
Latin America’s route to progress and double-digit economic growth seems to be plagued by large hurdles. As many have pointed out, the 2020’s could be the region’s second lost decade, and this is before taking into account the impacts of the coronavirus pandemic. Until the region manages to fix its corruption and weak rule of law issue, liberalize their economies and invest in much-needed infrastructure, the outlook will continue to look bleak.
The Oceania region primarily consists of Australia, New Zealand and neighbouring Southeast Asia. For the focus of the article, we will be primarily be focusing on NZ and Australia.
To many, there are a few distinguishable differences between Australia and New Zealand. Both are Western democracies and the economic system is directed towards free-market policies. Their economies are both dominated by the service sector, (NZ = 63%, AUS = 62.7% of total GDP as of 2013) with exports primarily consisting of aluminium production, food processing, metal fabrication, wood and paper products, mining, electricity, and water. Both faced the issue of being geographically isolated from global markets particularly the Western markets of Europe and the USA. Forcing them both into relentlessly perusing free trade agreements and focusing foreign relations within Asia particularly with South-East Asia and one another. New Zealand and Australia signing the 1983 closer economic relations agreement that only enabled free trade but also further aligned each other economies with one another.
If we look now exclusively at New Zealand we can see that they have an incredibly good GDP for its size and population of 205B. Their currency is the 10th most traded in the world and this is in part because NZ has an incredibly globalised economy and relies heavily on international trade most notably Australia with 25.6B NZ and China with 16.8B NZ. New Zealand because of its geographical distance from economic markets, relatively small size and dependence on global trade has meant is heavily relied on foreign investment. In 2014 foreign direct investment totalled 107.69B NZ From 9.7B NZ in 1989 an increase of over 1,000%. The consequence of this is that the economy is not distributed amongst the country's regions. Wellington and Auckland cities generate approximately 13.5% and 36.6% of the national GDP. However foreign ownership has also done nothing to improve New Zealand's foreign debt with it now totalling over 100% if the GDP.
Looking at Australia, there are some notable differences. Their economy is significantly larger and more present within global markets. With its GDP totalling over 1.89T as of 2019 and the longest streak of interrupted GPD growth of 26 years only ending in 2017 with a recession within the mineral and mining industries. This has enabled the country to hold the highest median wealth of individuals and a GDP per capita greater in Britain and Germany. However, they have an even greater dependence on exports with China. Totalling 120B, 30.6% of total exports. Both nations share this issue of overdependence on China for exports. Recently with Covid-19 Canberra insisted on pushing for an international investigation. China then imposed an 80 percent import tax on Australian barley and suspended beef imports from four Australian abattoirs. This was a significant issue considering Australia’s trade surplus with China (A$58.26B) amounted to more than 250 percent of its total trade surplus (A$23.23B), indicating that Australia ran a trade deficit with many of its trading partners. This is of particular concern, especially when considering both countries face of exponentially rising national debt. This stems from both nations never really recovering from the oil and natural resources recession in the 80’s as both made significant investments into the industry during that period.
Overall we can see that the region of Ocean has a substantial economy and regions within it have distinct and significant differences from one another.
The rise of populism in the bank of Central Eastern Europe, and its clash with the European Union.
Dornbusch and Edwards described the macroeconomics of a country with a populist leader. Populist leaders tend to represent blindness, an extreme amount of profligacy, recklessness of budget constraints, and carelessness of running out of foreign currency. Harsh populist moves already caused a severe backlash, for instance in the 1970s by the Chilean leader, Salvador Allende. But, according to the Financial Times, current (conservative) populists, maintain more discipline in their decisions. They seek to decrease the national deficit, leading to lower public debt. Moreover, they seek independence from foreign debt by offering government bonds to households, with favourable terms.
On the other hand, in Hungary after the increment of the government bond yield, the volatile Hungarian currency (HUF), remained unchanged and even devaluated in the run of the following months. In 2018 April the HUF plummeted against the Euro, which since that, kept up with its continuous downwards sloping trend while being highly volatile. This trend was not even affected as the yield was lowered in 2019 Aug 1st, closing as the worst-performing European currency. Why was the HUF left unchanged even though its government bond had one of the highest yields in the region?
One of the main reasons could be that in 2018 April presidential elections occurred in Hungary, with the absolute majority in favour of the same populist party. Besides the party’s already existing issues with the EU, a shift towards a more severe right-wing populistic leading style was expected. This outlook could have outweighed the effects of a bond yield increase. Additionally, the HUF was forecasted to depreciate 3% annually, which can be a profound argument, of a 4% yearly interest rate not being attractive enough. Despite the negative sentiment, initial domestic purchase expectation of the bond met, seemingly serving its purpose as more expensive, but stable funding for the government. However, the demand was not maintained, presumably due to the teeter of public faith in the Hungarian government. To mitigate this effect, new high yield paying instruments were released but the sum of public holding did not grow significantly as new purchases were financed with expiring old papers. Fuelled by conservative populist ideologies to reduce external exposure, foreign currency mortgages were converted into HUF. This mitigated the projected volatility of the HUF to the domestic budget. On the other hand, contradictory instruments were introduced presumably targeted to wealthy Russians and Chinese. These residency state bonds offered a legal settlement for the investor in a Schengen area, in return of investing €300,000 in these individual bonds. The income from these bonds is insignificant to the state budget, but the financing ended up to be very expensive for Hungary, costing more than €100 million to taxpayers.
The sentiments around Hungary are represented in the latest publishing of the Standard & Poor’s revealed April 27th, 2020, preceded the Moody’s release by two days. In a nutshell, the agencies kept the Hungarian rating of BBB and Baa3 but changed the classification from positive, to stable. The reasoning behind the decisions is mostly aligned, except for Moody’s expectations of a stagnating economy, opposed to a 3% estimated to shrink from S&P. Where S&P bases the projections on the current macroeconomic foundations, expecting the national debt to increase to a 70% level from its current 64.5%. The negative sentiments of Hungary are illustrated on the record low EUR-HUF rates. Moreover, intensified by the pressing concerns of the recently passed parliament bill, diminished the breaks in the system. Especially that this is not only worsening the investing picture but burning down the country’s relationship with the EU, which is a source of more serious threats to a smooth recovery from the current situation.