2014: recovery or complacency?

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As the world comes slowly into 2014 the October 2013 IMF ‘World Economic Outlook’ forecasts keep looming an inauspicious year for the developed and recession-hardened euro economies. Recovery is strongly hoped for, but trails lazily behind. A look at the global economic view casts a grey shadow (nearly literally by considering the map below) on most western economies not to specify the euro area.

Lackluster recoveries, and even recessions, are everywhere with the exception of some notable emerging markets still trying to impress the west with their righteous development agendas. The chart below shows where GDP growth really matters – and where asset management firms and investment banks have set their eyes and put their money since long.

With a lot of spare capacity in the industrialized world, as well as in some emerging countries, and with deflation marking the global central bankers’ agenda, we toasted at 2014 with the usual amount of optimism hoping for the best possible outcome. What can we realistically contemplate when referring to ‘best possible outcome’? Abstaining from answering this question with an economist inclination, I’d like to share my point of view highlighting some of the major challenges slow-paced growing economies (i.e. Italy) must face in the year ahead.

With households struggling to regain their bearings in the midst of a social, cultural and economic shakedown – brought about by a severe and hurting recession – Italy, and probably other southern European economies, are negotiating their mending process internally and externally. Internally, rooted and widespread vested interests suffocating business competitiveness put friction to the introduction of a politically-driven initiative to reform major public as well as private sectors. Externally, euro partners seem reluctant to recognize that large-scale and unresolved imbalances may still pose a backstop to a detrimental and self-fulfilling unraveling of pan-European cross-country cooperation.

This negotiation process, to resolve old and new structural issues, delays a possible and acceptable solution trading a long term forward-looking scenario for a short term myopic, NIMBY (not-in-my-back-yard) and defensive one. This might all as well be at the expenses of the youngest generations: with youth surrendering to the prospects of long term unemployment, where would all the creativity, energy and planning go in a decade or so?

Austerity vs. recovery is a new and uncharted theme in the political discussion attempting to oppose the former, German-driven unpopular antidote to the underlying causes of the current imbalances, to the latter, populist and stress-free government spending profligate correcting tool. Again, trying hard not to revert to my economic background, in the short run austerity lays the foundations for a long term and sustainable economic growth, even if too much focus on the former can kill the patient before it reaches full recovery in the medium term.


What does recovery need in the short term? A beginner scholar would certainly list government spending in the first place, though she or he would not forget the challenge such policy entails for public deficit (hover the mouse on the bubbles in the chart above to find your country). As austerity puts a drag in terms of net lending to the economy (see chart above), on the other hand it reduces government debt that lowers interest payment service. It is hard to side with austerity when domestic demand in southern European countries so much craves for government intervention.

These unstructured ideas share little with the conventional and common view on the economic outlook where complacency reigns (see what stock markets performed during 2013 and you will be baffled). ‘Recovery is under way’ is the dominating comment in the media. Recovery is probably a linguistic distortion, in the present case. The sense of security one usually experiences in the still before the storm.

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