Greece's latest austerity steps have squeaked through parliament, avoiding an imminent default. Politicians in Washington may manage a similar last-minute trick later this year to raise the U.S. sovereign debt ceiling, allowing the United States to continue borrowing.
But almost wherever you look in the wake of the global financial crisis of 2007-2009, widening domestic and international faultlines -- including those between political elites and the people they rule -- are making economic policy-making a more anguished process.
For now, despite periodic scares such as this week's votes in the Greek parliament, outright paralysis has been avoided. But in the euro zone at least, some believe it is only a matter of time before short-term solutions assembled by governments fail, ushering in a potentially chaotic sovereign default.
"We believe that Greece is a tragedy in four rather than two acts," said Stuart Thomson, chief economist at Ignis Asset Management, reflecting wider market worries.
"We don't believe that it will default in the near term, but over the medium term it is a virtual certainty...it is increasingly difficult to kick the can down the road because the can is becoming heavier."
Having nationalised a large part of the Western world's banking debt during the global credit crisis, governments are now struggling to solve sovereign debt crises -- potentially dragging on rising economies such as China which now own much of that debt and face their own worries over growth and inflation.
Both within countries and globally, that means a clash of powerful competing interests. Demographic trends in many countries may be starting to make these clashes fiercer; not only Europe but also China face heavy pressure on welfare and pensions systems in coming years from ageing populations.
So far governments have managed to take emergency steps to contain the crises, and make limited fiscal and economic reforms, despite protests from large sections of their populations. But almost everywhere, strains are showing.
"Once debt economics takes over, politics becomes a stalemate at best...and there is little anyone can do to take initiatives," says Vanessa Rossi, senior economics fellow at London think tank Chatham House.
"You can get a moribund political system unable to move forward -- see Italy for many years. These problems highlight why it's critical to address an escalating debt problem early and sufficiently to see progress before fatigue sets in."
GROWING FAULTLINES
In many countries, the global crisis has worsened divisions papered over during decades of boom. Disagreements between Athens and Berlin over fiscal discipline could be finessed when Greece joined the euro zone in a relatively healthy economic and market environment in 2001, but no longer.
As states that have seen rising living standards for generations try to reform, governments face pushback from unions, electorates and companies all keen to protect their interests.
Some believe Europe's tipping point will come when Greek politicians find themselves unable to keep pushing through reforms in the face of rising popular anger. But others say richer countries such as the United States and Germany, which are under less obvious and immediate economic pressure, may be the first to find policy-making on critical issues impossible.
In countries such as Greece, Ireland and Spain, despite howls of protest policymakers may be able to win the argument that financial markets and more powerful countries leave them no choice. That argument is less likely to wash in larger countries.
"I would mostly concentrate on the countries with the room to manoeuvre," said Marko Papic, analyst at U.S.-based political risk consultancy Stratfor. "These are the countries where people have the luxury to be populist."
That could include the United States, he said, where right- wing Republican lawmakers with links to the Tea Party were "playing with fire" by threatening to block attempts to lift the U.S. debt ceiling -- even though the failure to do so could trigger a technical default.
DECLINE OF THE NATION STATE?
"From Cairo to Athens, the word on the street is an anti-establishment refrain," says Citi chief political analyst Tina Fordham. "We will see an acceleration of the existing trend of political polarisation."
That could include heightened anti-immigrant feeling, euroscepticism, protectionism, ever-deeper divisions between deficit hawks and doves, and support for fringe political parties that could help to shape debates even if they never take power.
"There is a big story here," said Alastair Newton, a former senior British official who is now chief political analyst for Japanese bank Nomura.
"With the end of the Cold War, the consequent rapid surge in globalisation and the more or less simultaneous rise of the Internet have created a much more active civil society disrespectful of the political classes. Even in China."
Traditional government systems find themselves competing for influence with largely unregulated financial markets, multinational firms and other forces such as Cairo's street demonstrators and cross-border computer hackers. In some cases, governments are struggling.
"The nation state is leaking power, and it has been for some time," says Jeremy Greenstock, Britain's former ambassador to the United Nations. "That's a problem, because it is the basic unit of which our international system is made up, and other institutions -- the EU, UN, everything else -- draw their legitimacy from nation states."
There have been some unprecedented and partially successful efforts in the past few years to strengthen international economic cooperation. These include giving the International Monetary Fund a bigger role in monitoring global economic imbalances, and the euro zone's creation of a massive rescue fund to bail out Greece and other indebted countries.
But Greenstock thinks the weaker nation states mean the world will find it hard to meet challenges from climate change to financial crises to cyber security -- and it may take another, as yet unforeseen global shock or conflict to change that.
"If it was to continue indefinitely, you would have collapse and chaos," he said. "But it won't. The pendulum will swing back. But I worry we will need a scare to make that happen."
Editing by Andrew Torchia
Source: http://www.reuters.com
But almost wherever you look in the wake of the global financial crisis of 2007-2009, widening domestic and international faultlines -- including those between political elites and the people they rule -- are making economic policy-making a more anguished process.
For now, despite periodic scares such as this week's votes in the Greek parliament, outright paralysis has been avoided. But in the euro zone at least, some believe it is only a matter of time before short-term solutions assembled by governments fail, ushering in a potentially chaotic sovereign default.
"We believe that Greece is a tragedy in four rather than two acts," said Stuart Thomson, chief economist at Ignis Asset Management, reflecting wider market worries.
"We don't believe that it will default in the near term, but over the medium term it is a virtual certainty...it is increasingly difficult to kick the can down the road because the can is becoming heavier."
Having nationalised a large part of the Western world's banking debt during the global credit crisis, governments are now struggling to solve sovereign debt crises -- potentially dragging on rising economies such as China which now own much of that debt and face their own worries over growth and inflation.
Both within countries and globally, that means a clash of powerful competing interests. Demographic trends in many countries may be starting to make these clashes fiercer; not only Europe but also China face heavy pressure on welfare and pensions systems in coming years from ageing populations.
So far governments have managed to take emergency steps to contain the crises, and make limited fiscal and economic reforms, despite protests from large sections of their populations. But almost everywhere, strains are showing.
"Once debt economics takes over, politics becomes a stalemate at best...and there is little anyone can do to take initiatives," says Vanessa Rossi, senior economics fellow at London think tank Chatham House.
"You can get a moribund political system unable to move forward -- see Italy for many years. These problems highlight why it's critical to address an escalating debt problem early and sufficiently to see progress before fatigue sets in."
GROWING FAULTLINES
In many countries, the global crisis has worsened divisions papered over during decades of boom. Disagreements between Athens and Berlin over fiscal discipline could be finessed when Greece joined the euro zone in a relatively healthy economic and market environment in 2001, but no longer.
As states that have seen rising living standards for generations try to reform, governments face pushback from unions, electorates and companies all keen to protect their interests.
Some believe Europe's tipping point will come when Greek politicians find themselves unable to keep pushing through reforms in the face of rising popular anger. But others say richer countries such as the United States and Germany, which are under less obvious and immediate economic pressure, may be the first to find policy-making on critical issues impossible.
In countries such as Greece, Ireland and Spain, despite howls of protest policymakers may be able to win the argument that financial markets and more powerful countries leave them no choice. That argument is less likely to wash in larger countries.
"I would mostly concentrate on the countries with the room to manoeuvre," said Marko Papic, analyst at U.S.-based political risk consultancy Stratfor. "These are the countries where people have the luxury to be populist."
That could include the United States, he said, where right- wing Republican lawmakers with links to the Tea Party were "playing with fire" by threatening to block attempts to lift the U.S. debt ceiling -- even though the failure to do so could trigger a technical default.
DECLINE OF THE NATION STATE?
"From Cairo to Athens, the word on the street is an anti-establishment refrain," says Citi chief political analyst Tina Fordham. "We will see an acceleration of the existing trend of political polarisation."
That could include heightened anti-immigrant feeling, euroscepticism, protectionism, ever-deeper divisions between deficit hawks and doves, and support for fringe political parties that could help to shape debates even if they never take power.
"There is a big story here," said Alastair Newton, a former senior British official who is now chief political analyst for Japanese bank Nomura.
"With the end of the Cold War, the consequent rapid surge in globalisation and the more or less simultaneous rise of the Internet have created a much more active civil society disrespectful of the political classes. Even in China."
Traditional government systems find themselves competing for influence with largely unregulated financial markets, multinational firms and other forces such as Cairo's street demonstrators and cross-border computer hackers. In some cases, governments are struggling.
"The nation state is leaking power, and it has been for some time," says Jeremy Greenstock, Britain's former ambassador to the United Nations. "That's a problem, because it is the basic unit of which our international system is made up, and other institutions -- the EU, UN, everything else -- draw their legitimacy from nation states."
There have been some unprecedented and partially successful efforts in the past few years to strengthen international economic cooperation. These include giving the International Monetary Fund a bigger role in monitoring global economic imbalances, and the euro zone's creation of a massive rescue fund to bail out Greece and other indebted countries.
But Greenstock thinks the weaker nation states mean the world will find it hard to meet challenges from climate change to financial crises to cyber security -- and it may take another, as yet unforeseen global shock or conflict to change that.
"If it was to continue indefinitely, you would have collapse and chaos," he said. "But it won't. The pendulum will swing back. But I worry we will need a scare to make that happen."
Editing by Andrew Torchia
Source: http://www.reuters.com
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