WRITING ON THE WALL by Donkey Hotey
Want to earn $400,000? Here's what you need to do: find an exit policy for countries wishing to leave the European Monetary Union. That's it. If your idea is accepted, the money will be wired into your account by Simon Wolfson, the CEO of British retailer Next Group.
For the moment Wolfson's money looks safe. No matter what solution economists may come up with, the politicians are guaranteed to spike it. Quite simply, the deep divide that runs between the old rich and the emerging countries rules out an agreement on fixing the global economy. In fact, the G20 Cannes summit in November will be watched with interest for the posturing and power play of rival blocs than any constructive brainstorming.
G20: Old wine in new bottle
The trouble with finding a solution to what remains an essentially political issue is that what is good economics is bad policy. The G20 is being described as the economic steering committee of a new world order where emerging economic powers have a major say but in reality its very membership is an indication of status quo. As well as the US, Russia, China, India and Brazil, the G20 also includes the European Union, France, Germany, Italy and the UK. Of its 20 members, 12 belong to the Western axis.
So when headlines scream of the G20 delivering a virtual demarche, asking the Europeans to sort out the euro mess, just who is the group really wagging its finger at? Does Nicolas Sarkozy, the G20's current chair, issue an ultimatum and find it on his desk next morning as President of France?
The theatre of the absurd continues. The BRICS (the much talked about team of Brazil, Russia, India, China and South Africa) are included in the G20 summit this year. Less wealthy than the Europeans but flush with cash, they have offered a bailout plan: recapitalise the International Monetary Fund which can then offer loans to the desperately seeking PIGS (Portugal, Ireland, Greece and Spain).
However, the idea of recapitalisation of the IMF has been summarily dismissed by the US, which fears further dilution in Western stakeholding in the IMF. Indeed, this is one of the major irreconcilables that prevent consensus. Recapitalisation of the Fund will lead to demands for IMF reform. Translation: BRICS influence will rise at Europe's expense. Imagine Russia's Vladimir Putin or the Indians having a say in the running of the Bretton Woods sisters. Shock!
There are, of course, some internal differences over how much help the BRICS should offer. South Africa is quite clear: do nothing, given that the West's problems are of its own making. Brazil's view is that if they help, they want some benefits or at least some recognition.
The Financial Times couldn't have summed it up better, "The BRICS offer has been rebutted because it's not in the short-term political interest of the leaders of the US, UK, Australia and Canada to suggest to European leaders that an exogenous bailout is possible. If it were just the BRICS cash, that would be one thing, but in order to maintain influence in the IMF, the English-speaking quarter would have to follow suit. And there's no desire to do that right now."
Infighting in the eurozone
Another contradiction lies at the very heart of the eurozone. It may look like a homogeneous bunch but in reality the eurozone is a rich club with several poor underlings. At one end of the scale you have the powerhouse German economy cranking out a vast array of uber-quality goods. On the other end there's the underbelly, comprising chiefly the PIGS, which is really a tourist economy.
The upshot: every year Germany runs up an annual trade surplus of around $270 billion with these countries. This German surplus is the PIGS' debt. So the poor eurozone countries are increasingly in debt to Germany.
Before it joined the EU, life was simple for Greece. All it had to do was devalue its drachma, and its economy would become competitive again. Now trapped in the eurozone, Greek central bankers can't do a thing, except wait for bailouts.
And this is where it really starts hurting. Unless Greece becomes as efficient a producer as Germany it will continue to be in debt. That looks unlikely. Greeks (like the Irish or the Portuguese) are not known for producing Volkswagens or Leicas.
Deutschland uber alles
So why don't the Germans cut adrift the PIGS? Or why don't Greece and Spain quit the eurozone, go back to the good old days, and enjoy tourism-driven economic bliss? Well, because Germany doesn't want to lose its captive markets. For the German leadership it's also a matter of prestige because Germany is Europe's engine. Germany and France have also been mulling over a European military alliance built around their militaries. If the eurozone collapses, that alliance will be stillborn. You can't talk practical economics when you factor in such politics. In fact, Luxembourg's foreign minister Jean Asselborn remarked last year: "I can only warn Germany and France against a claim to power that shows a certain overbearingness and arrogance."
But why are the BRICS bailing out the rich? It is not because, as some believe, their largest export markets are in the West. On the contrary, they are trading more among themselves, slowly edging out the West from the world's fastest growing markets. The BRICS also share common goals. It is in their interests to reform the global financial system, which has been ruined by the corruption pervasive in Western markets. Inflation, which has resulted from the currency manipulations practised by the West, has impacted almost all BRICS countries.