The time is ripe for politicians to act

Next month’s US Presidential election has been a very firm check on any significant economic policy action by politicians not just in America but also in Europe and China.  It has been left to those in charge of the Central Banks to make all the policy running this year.  In response to the weakening economic data and political stalemates over the last six months, both Bernanke and Draghi have taken it upon themselves to take significant policy action and encourage their politicians to do the right thing.

This year, being an election year, it proved impossible to get any bipartisan agreement in the US on anything to do with the budget deficit – the Republicans insisted on no tax rises of any kind, and the Democrats were not prepared to contemplate any spending cuts.  Instead, they created an outcome of Mutually Assured Destruction, in which in the absence of any other agreement before the end of this year, substantial tax increases and spending cuts will automatically take effect from the start of next year.  If fully enacted, these policies would undoubtedly push the US economy into recession in 2013. It is only after the election in early November that the politicians will begin to get to grips with this issue.  The world economy needs a compromise to be effected between the two parties, assuming, as currently appears likely, that one party does not hold all three of the Presidency, the Senate and the Congress.

Markets are currently expecting that such a compromise does in fact occur.  The best time for any politician to make a politically difficult decision is immediately after an election, when any future electoral consequences are as far away as they will ever be.  Mr Bernanke has indicated that he holds an insurance policy in the event of no agreement and he will become much more aggressive with his QE programme, further to concentrate the minds of the Republicans.

In the Eurozone, the politicians have clearly adopted stalling tactics with regard to making a decision on whether to give further help to Greece, and have delayed receiving the Troika report from an initial late August date until mid November, just after the US elections.  The much smaller Cyprus bailout has also been delayed to be sorted out at the same time as Greece.  The Spanish bailout has also been delayed, first by the Spanish Prime Minister, who has regional elections on October 21st and who does not want to be seen asking for money before then. Also by Germany and some EU officials who are concerned about the knock-on effects in markets of a Spanish bailout request, most particularly for Italy.  Dealing with all of these together in November appears to be the preferred strategy, and as in the US markets are expecting there will be a satisfactory resolution (at least for now).  The longer term issues of enforced austerity weakening growth prospects and the lack of competitiveness in the Southern European economies will no doubt create further crises in due course.

China too is going through leadership change, with the new Politbureau team being unveiled just two days after the US elections.  Here too there has been evidence of policy drift this year with the slowing Chinese economy met by silence from the politicians, though the Central Bank have been easing policy a little during the year.  It is not known what the economic priorities of the new leadership team will be, but markets would appreciate an idea of the direction of policies that will be followed.

The last two months of the year thus provide the opportunity for politicians around the world to resolve several uncertainties about economic policy that have been allowed to build up ahead of the electoral time frame.  Some clear leadership in the next few weeks should boost market confidence, but political indecisiveness would be very damaging to markets. The time is therefore ripe for politicians to act.

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