Michalis Persianis
In a recent podcast, Dutch central banker Olaf Sleijpen and Jeromin Zettelmeyer, director of Bruegel, were asked about the trajectory of government bonds and the state of the markets.
“Orange alert,” Sleijpen replied, describing the shifting risks in the global economy. During the discussion, however, they pointed to two factors that help contain those risks and keep the situation in balance.
The first is that the main driver of growth, particularly in the United States, is the massive investment in artificial intelligence. And because of the belief that AI will significantly increase productivity, these investments are not particularly vulnerable to higher interest rates.
The second point, however, is more interesting. Fiscal pressures, they agreed, are indeed enormous, but the solution is remarkably simple. Advisers, analysts and central banks have little trouble identifying and recommending the right measures.
They are right. The United States and France are good examples, with high debt and persistent deficits. Both are economies that play a major role in driving the global economy.
In the United States, growth is being driven by technology investment. In France, growth is anemic. Yet the two countries have much in common. Taxes are already high, leaving little room for further increases. At the same time, cuts to public services, benefits or other forms of spending are not politically acceptable. An attempt to “tidy things up” in the United States was carried out chaotically and ultimately did little more than weaken services the government is expected to provide, while producing barely noticeable savings compared with other areas of spending. In France, the prime minister simply changes. Attempts to raise revenue from abroad, through tariffs for example, have proved fruitless. Inflation increases government revenues, but it is not enough.
The electoral cycle, with societies becoming increasingly polarized and divided, makes the situation even more difficult. Entrenched special interests, and their influence over political decisions, make difficult choices even harder to implement.
In other countries that are critical to the global economy, the picture is no better. Japan faces difficult choices, with resilient but shallow growth, high debt and demographic pressures. Its economy built strategies around low interest rates, which are now rising in an effort to bring inflation under control. Germany is also facing an imbalance, with relatively low debt but rising spending, inflation and weak growth. On top of that, the electoral cycle is creating additional pressure. In the United Kingdom, fiscal room is becoming increasingly limited.
Everywhere, the picture is similar. On one side, there is inflation, pressure on growth, rising interest rates and an uneasy response to geopolitical turmoil. At the same time, risks such as climate change and cyberattacks have yet to be fully assessed.
Economic pressures begin with politics: geopolitics, trade, war and elections. Economies then put pressure on political life through weak growth, pressure on real wages and inflation.
The distance between the two is growing even as their interdependence grows.
Yet we know the solutions. At some point, they will have to be implemented. The medicine is often bitter, but it works.
As Cyprus now enters its own pre-election cycle in earnest, the most important thing when it comes to domestic governance will be to keep the political conversation serious, measured and honest. There are solutions. There are choices. But most of them come with some degree of temporary pain.
And yes, special and local interests will have to get serious too: prisons, traffic islands, roofs, one-way systems and even roadblocks. The same applies to larger issues such as housing, traffic, water, energy and foreign direct investment. The long and polarized electoral cycle is, it seems, the fiscal risk that overshadows all the others.
If sober judgment prevails, along with an honest acknowledgment that solutions exist but may involve temporary difficulty, and sometimes pain, then we can remain optimistic.
