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The dramatic developments in Kiev have captured the world’s attention, and rightly so. But there is an economic debate underway that needs immediate attention as well.
President Obama announced that he intends to nominate Stan Fischer, the former head of Israel’s central bank, to serve as the vice chairman of the Federal Reserve. It also was announced that he would nominate Lael Brainard, the former Treasury undersecretary for international affairs, and would renominate current Fed Governor Jerome Powell to another term on the Fed Board. The moves had been expected–nonetheless, it is worth celebrating an excellent set of appointments. Stan Fischer is one of the leading macroeconomists and economic policymakers of our generation, and the Fed is fortunate to have him. (Full disclosure–Stan is a former professor of mine, and currently a colleague at CFR.) Jerome Powell has, by all accounts, played an important role at the Fed, and Lael Brainard brings a wealth of international policy experience to the position.
A showdown is looming at the World Bank over whether to discontinue or water down the Bank’s annual “Doing Business” Report. As reported here, and blogged about here, and here, China is leading the charge against the report, which is one of the Bank’s most controversial and influential projects. The U.S. government has been lobbying in favor of Doing Business, but so far has failed to generate the degree of high-level support from other G-20 countries or thought leaders that will likely be needed to save the report. A committee established by the Bank and headed by South African Planning Minister (and former finance minister) Trevor Manuel to assess the future of Doing Business will report as early as next week. Based on comments from advisors to the Manuel Committee, it looks as if its conclusion will be negative. After the report is received, President Kim will make his recommendation, which could involve eliminating the report or gutting it through presenting its results qualitatively or in buckets that reduce the transparency that is at the core of the exercise.
My conversations with investors on the margins of the IMF/World Bank meetings shows a broad anxiety about growth. Europe is first on the list of concerns, along with a slowdown in China and US fiscal drag. You would think that it would be easy, therefore, to produce G-7 and G-20 communiques that were pro-growth and highlighted the need for countries to act where they have the space. Apparently, that’s not the case, with the key players as divided as ever. Read more »
European best practice in crisis management is on display again with a mass of leaked documents–primarily on Cyprus–ahead of today’s Eurogroup meeting. I’d note a few things
Long-term budget forecasts are more art than economics. Small changes in assumptions and initial conditions, extrapolated over 25, 50 or 75 years, produce dramatically different outcomes. Should one assume current law remains in effect, producing structural improvement in the deficit over time, or rather that Congress acts as in the past in extending temporary cuts, adjusting tax brackets, and easing spending constraints as new needs arise? Will the recent slowdown in the rate of increase in health care costs persist? Your answer to these questions can swing the budget in the long term from unsustainable deficit to surplus. Still, these forecasts matter, as a statement of principle, as a description of philosophy, and in framing the debate.
The banks in Cyprus reopened today, with severe capital controls in place. Withdrawals by residents are limited to €300 per day; local businesses are limited to a maximum of €5,000 per day. Cross-border credit card transactions are limited to €5,000 per month, and border controls prevent travellers from taking more than €1,000 in bank notes out of the country per trip. Beyond these totals, payments for imports are subject to strict documentation. The Cyprus stock market remains closed until next week.
One of the striking features of the Cyprus crisis is the extent to which the ECB is driving the process. It was their threat to stop the flow of easy money to Cyprus that forced agreement on the earlier failed tax plan. Now, their threat to cut Cyprus’ access to Emergency Liquidity Assistance (ELA) if the government does not have an EU-IMF approved program in place by Monday accelerates events. With the banks closed and cross-border payments suspended, the immediate impact of a decision to terminate ELA would be muted. But without such funding, it will be virtually impossible for the major banks to restore normal operations, and reopening the banks would result in cascading failures through the entire financial system and the real economy. The intent clearly seems to be to force the government to the table. Will it do the trick? By next week, we may well know if there is a path for Cyprus to remain in the Eurozone.
Macro and Markets examines the forces influencing the global economy, macroeconomic policies, and financial markets.