Guest Post: WhyEurope (Not The Fed) IsCrushingEmergingMarketEconomies
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Authoredby Daniel Gros, originallyposted at ProjectSyndicate,
Emerging markets’ currencies are crashing, and their central banks are busy tightening policy, trying to stabilize their countries’ financial markets. Whoistoblamefor this stateofaffairs?
A few years ago, when the US Federal Reserve embarked on yet another round of “quantitative easing,” some emerging-market leaders complained loudly. They viewed the Fed’s open-ended purchases of long-term securities as an attempt to engineer a competitive devaluation of the dollar and worried that ultra-easy monetary conditions in the United States would unleash a flood of “hot money” inflows, driving up their exchange rates. This, they feared, would not only diminish their export competitiveness and push their external accounts into deficit; it would also expose them to the harsh consequences of a sudden stop in capital inflows when US policymakers reversed course.
At firstsight, thesefearsappearto have beenwellfounded. As the title of a recent paper published by the International Monetary Fund succinctly puts it, “CapitalFlowsareFickle: Anytime, Anywhere.” The mere announcement that the Fed might scale down its unconventional monetary-policy operations has led to today’s capital flight from emerging markets.
But this viewmisses the realreasonwhycapitalflowedintoemergingmarkets over the last few years, and why the external accounts of so many of them have swung into deficit. The real culprit is the euro.
Quantitativeeasingin the UScannot have beenbehindtheselargeswingsinglobalcurrent–accountbalances, because America’sexternaldeficithasnotchangedsignificantlyinrecentyears. This is also what one would expect from economic theory: in conditions approaching a liquidity trap, the impact of unconventional monetary policies on financial conditions and demand is likely to be modest.
Indeed, the available models tell us that, to the extent that an expansionary monetary policy actually does have an impact on the economy, its effect on the current account should not be large, because any positive effect on exports from a weaker exchange rate should be offset by larger imports due to the increase in domestic demand.
This is what has happened in the US, and its recent economic revival has been accompanied by an expansion of both exports and imports. The impact of the various rounds of quantitative easing on emerging markets (and on the rest of the world) has thus been approximately neutral.
ButausterityinEuropehas had a profoundimpacton the eurozone’scurrentaccount, whichhasswungfrom a deficitofalmost $100 billionin 2008 to a surplusofalmost $300 billion this year. This was a consequence of the sudden stop of capital flows to the eurozone’s southern members, which forced these countries to turn their current accounts from a combined deficit of $300 billion five years ago to a small surplus today. Because the external-surplus countries of the eurozone’s north, Germany and Netherlands, did not expand their demand, the eurozone overall is now running the world’s largest current-account surplus – exceeding even that of China, which has long been accused of engaging in competitive currency manipulation.
This extraordinary swing of almost $400 billion in the eurozone’s current-account balance did not result from a “competitive devaluation”; the euro has remained strong. So the real reason for the eurozone’s large external surplus today is that internal demand has been so weak that imports have been practically stagnant over the last five years (the average annual growth rate was a paltry 0.25%).
The cause of this state of affairs, in one word, is austerity. Weak demand in Europe is the real reason why emerging markets’ current accounts deteriorated (and, with the exception of China, swung into deficit).
Thus, if anything, emerging-market leaders should have complained about European austerity, not about US quantitative easing. Fed Chairman Ben Bernanke’s talk of “tapering” quantitative easing might have triggered the current bout of instability; but emerging markets’ underlying vulnerability was made in Europe.
The fickleness of capital markets poses once again the paradox of thrift. As capital withdraws from emerging markets, these countries soon will be forced to adopt their own austerity measures and run current-account surpluses, much like the eurozone periphery today. But who will then be able – and willing – to run deficits?
Two of the world’s three largest economies come to mind: China, given the strength of its balance sheet, and the eurozone, given the euro’s status as a reserve currency. But both appear committed to running large surpluses (indeed, the two largest in the world). This implies that, unless the US resumes its role as consumer of last resort, the latest bout of financial-market jitters will weaken the global economy again. And any global recovery promises to be unbalanced – that is, if it materializes at all.
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The orchid plant is one of the most beautiful and diverse plants to be found in the world today. There are estimated to be more than 35,000 different species worldwide. They are all over Thailand, everywhere from the mountains in the north to the tropical rainforests of the south. In Thailand there are 1,230 species of orchids, including 150 that are unique to the country. There are two most common types of orchid in Thailand.The Cymbidium is a genus of orchids found all over S.E. Asia. There are, however, a few species that are unique to Thailand, where they are collected for cultivation. Devons cymbidium (Cymbidium Devonianum) is found high up in the moutanis of northern Thailand, at an altitude of between 5,000 and 7,500 feet. It has a unique cascading flower stalk that can hold up to thirty pink flowers with red veins and small, dark-red centres. It blooms at the end of the cool season in March and April. Tracys cymbidium (Cymbidium Tracyanum) is a fragrant species that blooms in the fall and has green and red flowers with a yellow centre and speckled with red-brown spots. The flowers are between 4 and 6 inches in diameter. They are found in trees at altitudes of between 4,000 and 6,000ft, mostly around central Thailand. Black-purple cymbidium (Cymbidium atropurpureum) is unique to the southern peninsular of Thailand. It blooms in spring with a pendulous, 3 foot stalk that holds up to 35 flowers. Flowers are about 2 inches across and are dark purple or black in colour. They have a surprisingly unpleasant smell. Black purple cymbidium is epiphytic and lithophytic (meaning that it grows out of soil and on rocks), and they prefer rocky slopes.The Paphiopedilum is a species of orchids that is found all over Asia and even into the Pacific islands. They are also called Ladys Slipper orchids because of their unique shape. Mrs Godefroys paphiopedilum (Paphiopedilum Godefroyae) is a smalle orchid unique to peninsular Thailand and the coastal islands. It is hardly ever found growing in trees and prefers the ground. It is only ever found found more than 50 ft above sea levek. This plant has long, green leaves with dark speckling and purple underside. The flowers grow on a 3 inch stalk and are pale green with red speckles. The flowers bloom in winter and spring. Sukhakuls paphiopedilum (Paphiopedilum Sukhakulii) is a very unique flower that can be found growing in the leaf litter on the side of streams in the Phu Luang mountains of Loei in Thailand. It produces 3 or 4 leaves with dark yellow-green mottling. It produces only one flower which is about 5 inches wide with vivid red and green markings.