Robert Kahn

Macro and Markets

Robert Kahn analyzes economic policies for an integrated world.

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Brexit, Emerging Markets, and Venezuela in the News

by Robert Kahn

Three things to think about today.

  1.  If you haven’t already done so, subscribe now to my colleague Brad Setser’s blog, which provides excellent commentary on global macro issues. His most recent piece makes a compelling case for European fiscal action against the backdrop of a meaningful UK and European growth shock, a point that I very much agree with (listen also to my conversation with Jim Lindsay and Sebastian Mallaby here).
  2. I remain puzzled that this industrial country growth shock has not had a broader effect on emerging markets. Reports are that portfolio outflows from EM were minor on Friday, with some recovery this week. One view is that as long as China’s economy remains on track, commodity prices hold up, and the Fed is on hold, emerging markets should weather the Brexit shock. Conversely, the IMF has worried that declining trend growth in the emerging world reflects a rising vulnerability to globalization.
  3. The humanitarian situation in Venezuela has become critical. I have focused in past blogs on the severe economic consequences of the crisis, and the need for a comprehensive, IMF-backed reform effort, supported by substantial financing and debt restructuring. China’s recent agreement to push back debt payments due recognizes the inevitable but is unlikely to provide additional free cash flow to the government or the state energy company PDVSA. For investors, default now looks to be coming soon.

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Brexit’s Threat to Global Growth

by Robert Kahn

Thursday’s Brexit vote wasn’t a “Lehman moment”, as some have feared. Instead, it was a growth moment. And that may be the greater threat. If policymakers respond effectively, the benefits could be substantial: a stronger global economy, and an ebbing of the political and economic forces now pressuring UK and European policymakers. Conversely, failure to address the growth risks could cause broader and deeper global economic contagion.

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Macri-economics in Argentina

by Robert Kahn and Ted Liu

While markets have focused attention on China as the primary source of market risk in 2016, Latin America has provided the more significant headlines in recent weeks.  Political turmoil in Brazil has resulted in the resignation of a market-friendly finance minister, and default looms in Venezuela.  But perhaps nowhere in Latin America is more at stake than with the economic revolution now underway in Argentina.

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Addressing Economic Populism in Europe

by Robert Kahn

My latest global economic monthly looks at rising economic populism in Europe and how it constrains the capacity of policymakers to get a robust recovery going and deal with shocks. Some of the drivers of populism—on the left and right, in creditor and debtor countries—are cyclical but many including globalization, income inequality and insecurity are likely to be more persistent and resent a long-term threat to greater European integration. The strong showing of the National Front in last weekend’s French regional elections, Denmark’s referendum rejection of further EU integration, and Britain’s debate over its EU future are recent reminders of the fraying consensus on further integration, which has strong implications for economic cooperation. Easy money from the European Central Bank (ECB) can only do so much, and a broader policy response including a faster pace of economic integration and more flexible fiscal policies now are needed.

ECB and the Limits of QE

by Robert Kahn

Markets were clearly underwhelmed by the European Central Bank’s (ECB) easing announcement yesterday, marginally cutting its (already negative) deposit rate and extending the duration of its asset purchase program (QE). I think the Financial Times had it about right. It would have been better to do more, but what they did was helpful and it retains the capacity for further action. Still, as Ted Liu and I argued yesterday, the main channel through which QE is going to boost activity in Europe (as the Federal Reserve normalizes) is through the exchange rate, which in the context of weak global demand and emerging market capital outflows may be a modest source of stimulus. The market reaction also underscores the challenge for a central bank to communicate its intentions when the governing council is divided and it is trying to be data dependent–i.e., it is hard to communicate what you don’t know. We also agree with the FT’s bottom line: at this time, monetary policy alone cannot be expected to carry forward a robust European recovery.  Fiscal and structural policies must do their part.

APEC Summit Economics: the Case for Trade

by Robert Kahn

The Asia-Pacific Economic Cooperation (APEC) Summit, tomorrow and Thursday, will no doubt see its trade and regional integration agenda overshadowed by new global threats. At this week’s Group of Twenty (G20) summit, the economic agenda rightly took a backseat to the horrific attacks in Paris. Leaders reaffirmed their commitment to strong, sustainable, and balanced growth, and endorsed a range of initiatives underway from climate change to tax and financial reform. But few new economic initiatives were announced. A similar outcome is likely in Manila, though trade and investment deserve a central seat on the stage in the name of preserving global growth.

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Greece’s Bailout Dead End

by Robert Kahn

It should be no surprise that eurozone finance ministers failed to agree to disburse €2 billion in bailout money to the Greek government today or to release bank recapitalization funds. Despite optimism following the recent announcement of a relatively benign program for recapitalizing Greek banks, it is hard to escape the conclusion that the Greek program again is headed off track.  The government has fallen behind its reform commitments, and a substantial number of additional end-year measures look unlikely to be met. Even with substantial forbearance from Greece’s European partners, it now looks likely that conclusion of the first review of its program will be delayed and that the promised debt relief negotiation will come only in 2016. Further, an eventual International Monetary Fund (IMF) program is likely to be small and leave a large unfilled financing gap that will further strain Greece’s relations with its European neighbors.  It is hard to predict how long Greek voters will continue to support a government that cannot deliver on its economic pledges of low debt and sustainable growth.

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Are We Ready for the Next Emerging Market Crisis?

by Robert Kahn

This summer’s market turmoil was a serious jolt to emerging markets, particularly commodity exporters and those countries with strong trade and financial ties to China. Fortunately, there are good reasons for comfort that the tail risks facing these countries do not rise to the level of the Asia financial crisis or the Great Recession. After early missteps, China’s policymakers have been more assured in recent weeks in signaling their commitment to near term stability and support for growth. Financial distress in emerging markets, the most serious channel for contagion, has yet to materialize. Moreover, bolstered by high reserve levels, more flexible and competitive exchange rates (see chart) and in some cases better policies, emerging market buffers against contagion have been strengthened.

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A U.S. Budget Deal that Matters

by Robert Kahn

This is what governing looks like.

When outgoing speaker John Boehner promised to “clean the barn up a little bit” before leaving, there was understandable skepticism that a large number of must-pass pieces of legislation could be sheparded through a sharply divided congress.  From that perspective, last night’s agreement on a budget framework—if it holds—looks to be an important step forward. While far from ideal budgetary policy, it removes substantial tail risk from U.S. economic policymaking between now and the election.

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The Fallacy of Euro-Area Discipline

by Robert Kahn

Throughout the Greek crisis, policymakers have acted on the assumption that Greece’s best chance at sustainable growth is through the conditionality and discipline of an IMF-EU adjustment program. Already, the desire to stay in the eurozone and receive the promised rescue package of at least €86 billion has led to significant legislative measures, and the ESM and IMF programs under negotiation will be comprehensive in the scope of their structural reforms. In contrast, “Grexit” would be chaotic, and at least initially, make it difficult for any government to reach consensus on strong policies needed to restore durable growth. In that environment, the boost to growth from devaluation could prove short-lived.

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