Public Finance & Debt Management: Make It or Break It!
Transformation vs. Muddling Through
The child prodigy session of the Global Economic Symposium 2011 has arguably been the opening plenary, loftily called Transformational Insights into Global Problem-Solving. Transformation? Global? Problems? Solutions? All these in 75 minutes?
As Nik Gowing, session moderator and main presenter of BBC World was saying in his opening remarks, most high-level government leaders that were scheduled to come this afternoon in Kiel (EU Commissioners, Prime Ministers and Finance Ministers) needed unfortunately to miss out on GES2011 and instead do the actual problem-solving. Of what, you may ask? Well, let’s count: life-threatening levels of public debt, stagnating economic growth, financial sector instability, dwindling energy supply, shortage in the global food supply and every couple of weeks violent disruptions of peace and security.
A piecemeal vs. transformational problem-solving debate emerged, with statements coming from Ali Babacan, Deputy Prime Minister of Turkey, that would make any media pundit jump with joy. “We need kamikaze governments” or “we know what what we need to do, but we don’t know how to do it and get reelected”. Responses coming from World Bank Managing Director Mahmoud Mohieldin or Boston Consulting Group CEO Hans-Paul Bürkner were more moderate, focusing on the role of trust and communication, while underlying politicians are the same as 20 years ago and it’s all about trial and error.
One way or another, the feeling seemed to be that public finance is the world’s number one global challenge. The topic was taken over in the off the record panel Redesigning Fiscal Consolidation and Debt Management, with Paul Wallace from The Economist as moderator and high-level policy-makers (Mehmet Şimşek – Minister of Finance of Turkey, Edward Lazear – Chief Economic Advisor to President G.W. Bush, Pablo Guidotti – Secretary of the Treasury in Argentina in the sensitive 90s and BCG CEO Bürkner) as speakers.
Dominoes vs. Popcorns
Seven proposals on fiscal consolidation were put forward (from debt rescheduling, appointing independent fiscal authorities, to replacing the 60% debt to GDP rule with longer maturities and variable sizes of borrowing requirements). Inevitably, the subject matter touched on Greece (whose figures have become much worse than Argentina’s in its darkest days – and the latter could always devaluate anyhow). More or less abruptly, experts candidly stated that WE (including the IMF) need to stop pretending and prepare for one form or another of default. European economic governance was not unfortunately sufficiently addressed. My idea is that, risking oversimplification, a Finance Minister of Europe would do the job. As one panelist put it, we’re talking here about dominoes vs. popcorn. Contagion (i.e. “dominoes”) is not our biggest problem. Instead, EU Member States are like corn kernels in a popcorn pan steaming with hot oil. Even if you take one kernel out, others will start popping. And it’s impossible to take all of them out! Instead, stop focusing on individual countries, and reform institutions affected by this. Strengthen the pan to avoid the lid from jumping off.
In the end, Achilles’ heel is not whether Greece, Portugal or Italy falls. But whether the EU can get its act together and implement some credible structural reforms for boosting competitiveness.
