During the last day of 2011, just when the fact that GDP has not been exceeded by 55% was being hailed as one of the year’s triumphs, I tweeted my wish list for 2012. To sum up it was for the euro zone to stay intact, for the government to keep its promises, for investments to stay on their current roll, for the zloty not to weaken excessively, and for the IMF to finally commit to rescuing Italy. I wished that the world might finally understand that in economics there are no shortcuts and that in the euro zone we might at last see some chinks of light at the end of the tunnel. Let me elaborate…
Euro zone isn’t about to fall apart
I don’t believe that the euro zone is about to fall apart. This would not be either in the interests of countries which might be considered candidates for leaving the zone nor for those intending to remain. Let us not forget that this is a political project and that politicians will dictate what kind of year the zone will have. And as long as the price of saving the common currency will be lower than the cost of eurozone disintegration, everything will be done to prevent collapse. As the costs of disintegration are a great unknown, I do not expect anyone in Europe to wish to go that route. Not even one country leaving. With the current level of tension, a country leaving the common currency zone – let’s say Greece – would trigger a domino effect. This certainly doesn’t mean that leaving the Eurozone will be become an impossibility. The problem of how to organise a controlled exit should be solved swiftly and adopted together with the New Fiscal Pact.
Poland in 2012
In Poland 2012 will be fraught with serious systemic challenges. The economy will slow, debt will not decrease and businesses be reluctant to invest and create jobs in a climate of such stark uncertainty. The structural changes announced by the government may not be enough to stem rising debt but they do represent critical additional fuel for the growth of the Polish economy in the future. Two such key changes are the raising of the retirement age and the reform of the state pension and sickness fund for farm workers (KRUS). Legislation to raise the pensionable age should be adopted during the first quarter of 2012 while the Council of Ministers should adopt the necessary legislative amendments in the matter of KRUS reform. There is no point in delaying, it is better to act preemptively than be at the mercy of the markets.
For investments to maintain their current momentum, it will be necessary to invest more in both the public and private sectors than in 2011 which will not be an easy thing with the drop in public spending. Because that would mean that the increase in the volume of investments made by private investors would have to considerably exceed 2011 figures. 2011 was marked by optimism at least until summer. At the moment many large domestic and foreign investment projects have been suspended which unfortunately does not bode well for investments in 2012. The lack of urgency is primarily caused by an uncertain future which is mainly in the hands of the leaders in the euro zone who didn’t handle the 2011 crisis particularly well.
“In 2012 net exports will have a positive effect on growth” In actual fact this sentence is a little misleading as the weak zloty will make firms reluctant to expand as they fear that there will be less demand for their products. The current weakening of the zloty is linked to the risk of recession in the euro zone. For Polish businesses which have to bear the entire risk of currency fluctuations, there is nothing worse than the exchange rate roller coaster. I would like the zloty to remain stable in 2012 with no wild swings either way. These are however pious wishes because the situation on the financial markets is far from being stable. It’s enough to recall that in the first quarter of this year half a billion’s worth of bonds denominated in euros will have to be rolled over.
Italy and IMF
I cannot see Italy’s problems being solved without IMF help. Let’s not delude ourselves – there is no money available for a firewall for Italy. Not coming from the ECB at any rate and neither will the German government agree to the further printing of euro bonds. Mario Monti is capable of requesting help from the IMF and the IMF is prepared to give conditional aid. And this should happen in 2012. Those people calling for massive bond purchases by the ECB are forgetting that in economics there are no shortcuts. Just as there is no such thing as perpetual motion, there is no easy and palatable solution for rescuing countries which are heavily in debt and sunk deep in recession.
And in the end I am quietly hoping that at least towards the end of the year we will see some green shoots in the euro zone which promise growth during the coming years. I hope, or rather I fear that this will be a year of stagnation which is in itself an optimistic outlook.