Looking at challenges from ‘Grexit’ fears, slowdowns in China and political gridlock in the US, investors and businesspeople naturally want a solution. But there is no solution, just a long slog that, for parts of the eurozone, will see them leave the family of developed markets.
For independent economist Andy Xie, the current debate in Europe between growth and austerity is meaningless. “Debt is a symptom, a way of covering up problems,” as opposed to the problem itself, so policies aimed just at debts will fail, he says, speaking last week at an AsianInvestor conference.
The return of China to the global economy, with a huge, productive population that accepts much lower living standards than Westerners, plus the ability of multinationals to operate across borders, has undermined the ability of many Western labour forces to retain their quality of life.
Globalisation has required Westerners to embrace leverage to maintain living standards that are ultimately unsupportable, Xie says…and sped up China’s return to prominence via its exports.
Xie doubts the West has really addressed its debts since the 2008 financial crisis began. He says US household debts are lower today because of bankruptcies – defaults – rather than paying it off, while in Europe, Germany and other strong northern states are subsidising southern neighbours hardest hit by Chinese competition.
“The outcome is not about growth or austerity,” Xie says. “It is about a reduction in living standards. People must accept that. There is no way out. If your response to this is irresponsible, in other words you don’t pay down the debt, you just become poorer.”
Nor can stimulative policies to grow countries out of debt work: “Growth is just going to give more money to the deadbeats, who will spend it,” he says.
Xie says capitalism requires a certain behaviour and a work ethic to function. “Europeans want all the benefits without the responsibility, and they will become developing countries again.” Ultimately the debt has to be paid, so it is paid in the form of stagflation and taxpayer bailouts.
“The Greek strategy is to slow-boil Germans like frogs in a wok,” Xie says, predicting the Germans will be forced to print money, implying the long-term refinancing operations (LTRO) of the European Central Bank have already set Germany down this path. Xie says Europe is set to repeat the past century’s history of Latin America.
The US, despite its own profligacy and poor educational system, has several advantages that keep it competitive, including its agricultural base, and natural resources, notably its revolution in shale gas. This allows US manufacturing to cut energy costs to just 25% of China’s.
But its healthcare costs threaten American productivity. Xie says obesity and other issues are bleeding the economy: a generation of children has been born to ill health, wasteful education and ultimately shorter lifespans.