ECONOMIC CHEMOTHERAPY
By Udayan Gupta
Global Finance sat down with economist Robert Brusca, head of consultancy FAO Economics, to discuss the global outlook, the future of Greece and the problem with current-account surpluses and deficits. Brusca has been a member of the Federal Reserve Bank of New York and held the post of chief economist at Nikko Securities.
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Robert Brusca doesn’t mince words. He is convinced that any solution to the global economic crisis will require fundamental changes in how we all do business and conduct trade. More to the point, those solutions will be painful.
Global Finance : How are managed exchange rates and current-account surpluses and deficits part of the problem?
Robert Brusca : Nobody has wanted to talk about exchange rates and how they are managed. As a result we have countries that have had nothing but surpluses and deficits for 10 to 12 years in a row. There are a lot of countries that have these exchange-rate-targeted growth policies, and they pursue this. It’s one of the reasons why the US is in such trouble: They run their exchange rate policy to have a current-account deficit, which means they acquire dollars that they don’t really need and don’t really want.What happens if people no longer want to hold the dollar as the reserve currency?
On the other hand, everyone is trying to build a current-account surplus by exporting. Everyone thinks it is their birthright to export. But ironically, in this environment, it’s surplus-running countries that will be hurt.
GF : Is that because there is no demand?
Brusca : The most precious thing in the world is domestic demand, and that’s what we have a shortage of. And, oddly, the deficit countries are among the stronger countries and the surplus countries are among the dangerous countries, which goes against the grain of conventional economic thinking.
GF : You’re saying that as a deficit-running country the US hasn’t been hurt as much as its counterparties?
Brusca : Yes. Look at China. Up until this point China has been a low-grade-export-oriented country. It is geared up to exploit global domestic demand, but there is no global domestic demand. And China is also suffering from overproduction. Although it’s not in the statistics, which is not surprising. This is a country that doesn’t protect international trademarks, it doesn’t tolerate domestic dissent, it controls the Internet. It suppresses bad news.
GF : Let’s move on to Europe.
Brusca : Europe’s biggest problem is its competitiveness divide [price differences in the cost of goods and services owing to different country-by-country inflation rates since the euro was launched]. You’ve got huge competitiveness problems in Greece, in Spain, Portugal. The way you fix competitiveness is through devaluing your currency, but by definition currency devaluation is the end of the eurozone. I don’t think there is a way you can keep Spain and Greece and Portugal in the eurozone.
They need to run recessions to eventually grind the price disparity down. But using macroeconomic policy to solve this problem is not very targeted. You destroy people’s incomes. You destroy all kinds of things. I like to refer to it as economic chemotherapy. If you have something in your body, you dose yourself with chemotherapy and hopefully you will kill it before it kills you. But sometimes you can only kill it by killing the patient.
It’s barbaric treatment. It’s hard to roll back people’s wages and ask them to make sacrifices. But that is the only way to get back in line with the rest of Europe. Float the drachma, and if it falls 50%, it looks great to investors. Suddenly there’s a lot of Russian money looking at Greece. When a currency gets that weak, it’s a new game and there are new opportunities.
