1 German austerity may beggar Europe (Costas Lapavitsas in The Guardian) Has the eurozone crisis ended? Many politicians in Europe, including France’s president Francois Hollande, seem to think so. Well, not so fast. Far from ending, the crisis is yet to reach its most difficult phase.
It is easy to see why politicians claim the crisis is over. Greece has just been promised another €50bn, provided it accepts still more austerity, deregulation and privatisation. Elsewhere in the periphery, Ireland is in its sixth year of recession, Portugal is heading for major economic contraction, and Spain is going from bad to worse – but their governments are imposing austerity, and people appear to be putting up with it. Even core countries, including Italy and France, have accepted the need for balanced budgets. Across the eurozone, there is no effective opposition to the mantra of austerity emanating from Berlin.
But austerity and calmer financial markets do not amount to ending the crisis. Rather, they point to the emergence of a German eurozone. Commentators who have protested that crisis leadership in the eurozone has been weak have been wide of the mark. In practice, austerity is transforming the periphery into a vast East Germany: a zone of weak growth, low wages, poverty and no economic dynamism. There will not even be some of the fiscal transfers, amounting to perhaps €60bn annually, that have supported East Germany.
The most telling piece of evidence of the emergence of a German eurozone has been the reluctance to confront the deeper cause of the crisis, namely the divergence in competitiveness between – mostly – Germany and the rest. German gains in competitiveness have not been due to greater efficiency, but are a result of the fact that Germany has systematically undershot the eurozone inflation target, while other countries have either hit, or overshot it thanks to the wage restraint imposed on its workers, harsher than elsewhere. Over the years a great gap has emerged between Germany and the rest, especially the periphery, whose competitiveness has collapsed.
The solution would be for Germany to rebalance its economy by strengthening domestic demand. Instead, Berlin’s reliance on exports has grown: in 2012 the contribution of its domestic economy to growth will be zero. The eurozone is becoming a vehicle for German mercantilism, whereby the German people are first beggared in order subsequently to beggar others.
2 South Korea cuts growth forecast (BBC) South Korea has cut its growth forecast for this year and for 2013, underlining the effect of a slowdown in its key export markets on its growth. The finance ministry has forecast a growth of 3% for 2013, down from its earlier projection of 4.3%. South Korea’s exports, which account for almost half of its overall economy, have been hit by slowing demand from markets such as the US and eurozone.
“Growth next year will be better than this year, although there are significant downside risks,” said the finance ministry’s Choi Sang-mok. The sovereign debt crisis in the eurozone has hurt demand for South Korean exports from the region. Meanwhile, the economic recovery in the US – another key market for its exports – has also remained fragile and consumer demand there has not picked up drastically.
The slowdown in demand for exports has hurt growth in Asia’s fourth largest economy. South Korea’s economy grew at its slowest pace in three years in the July to September quarter, expanding at an annual rate of 1.6%.
3 A year to forget for India Inc (Khushita Vasant in The Wall Street Journal) For corporate India, 2012 can’t end soon enough. India’s economy is growing at its slowest pace in a decade, taking its toll on the profits and expansion plans of companies. In addition, there were several events this year which hurt India’s image as an attractive business destination.
Here are some events that India Inc. would prefer to forget: Retroactive tax plan. Foreign investors were spooked about investing in India when India said it planned to retroactively tax some international mergers. The proposal seemed to be the government’s effort to override a Supreme Court ruling. In January, India’s highest court ruled that India’s tax authorities didn’t have the jurisdiction to tax Vodafone of the UK for a 2007 purchase of an Indian cellphone company because the deal was between two foreign entities. The idea that such deals could now be retroactively taxed, raised questions about the credibility of India legal system and of the government. Foreign investors balked from putting money into India for several months.
Rupee’s decline: The rupee’s slide, which started in late 2011, continued this year with the currency touching its lowest-ever rate against the dollar in the summer. On June 22, the rupee was trading at 57.33 to the dollar, a decline of 21% over the previous 12 months.
Maruti Suzuki riots: A labor agitation that turned violent at Maruti Suzuki India factory raised concerns about work safety and security in India. Telecom trouble: A scandal over the allotment of second generation or 2G telecom licenses to Indian mobile phone companies spilled over into 2012, hurting the telecommunications industry.
Mallya’s malady: If there’s anyone wishing that 2012 ends quickly, it must be Vijay Mallya, owner of the once high-flying Kingfisher Airlines Ltd. Kingfisher hasn’t made a profit since it was founded in 2005, but this year its financial health deteriorated further, amid high interest charges and high fuel costs. As of the end of November, Kingfisher owed more than $36 million to the government in taxes.