The year 2012 was another big one for the world’s economic policymakers, with plenty of agita around the European financial crisis, stimulus plans in China, and particularly big advances in the science of central banking. Let’s set aside the more prosaic failures of crony capitalism and corruption to focus on those who really should have done better. Here are seven of the biggest mistakes public officials made trying, and failing, to bolster global prosperity:
1) Mario Draghi tricked Europe. In the summer of 2012, Europe was in one of the darker moments of its ongoing financial crisis, with Spain and Italy feeling pressure from creditors, Greece toppling and the region heading for recession. Then, European Central Bank chief Mario Draghi, not even a year into his job, promised in a speech that he would “do whatever it takes to save the euro.” Markets rallied! But at the Bank’s next meeting in August, Draghi didn’t do anything. Markets dropped! Draghi would eventually announce plans to buy bonds from European countries that adopted fiscal consolidation programs, but he didn’t do anyone a favor by waiting for the opportunity.
2) The US didn’t do anything meaningful on economic policy all year. Relative decline or no, the US is still the world’s biggest economy, and its policymakers—with the important exception of the Federal Reserve—spent 2012 doing absolutely nothing. The reasons why are obvious: A divided government in an election year isn’t a great venue for accomplishment. But consider what could have been done: needed stimulus to bolster the country’s slow economy and fight unemployment; a measured fiscal consolidation rather than the six-week race to the edge of the fiscal cliff; or structural reforms, like fixing the country’s broken immigration system, passing a climate change bill or cleaning up the convoluted tax code.
3) The EU didn’t write down Greek bonds. Well, you can’t fault Christine Lagarde for trying—the IMF Director forced a confrontation with the ECB and the European Commission (read: Angela Merkel’s austerity-focused Germany) in an attempt to forgive some of Greece’s unsustainable debt load. The Troika’s ultimate deal didn’t include haircuts on Greek debt, though it did include some concessions on interest rates and repayment time. Punting on debt forgiveness may not look very wise in hindsight, however: Though Greece’s credit rating has been upgraded (from selective default) thanks to the support from the rest of the EU, it still has bleak economic prospects. That debt is going to be written down sooner or later, and sooner would probably have been better.
4) The whole world didn’t do anything about climate change. The World Bank has released a new report on what would happen if average temperatures rose four degrees celsius. Answer? It would be really bad, with droughts impairing food supplies and economic activity, flooding destroying coastal cities, and spreading disease. Another report, from the International Energy Agency, predicts that if a global carbon emissions regime isn’t instituted by 2017, a two degrees celsius increase in climate change will be locked in. So what has the world done? Talked about talking about a deal…in 2015. To be sure, the US and the EU have both reduced carbon emissions in recent years, through a combination of policy and shifting economic trends, but without worldwide action, there’s going to be trouble down the line.
5) The United Kingdom kept austerity alive. Prime Minister David Cameron’s government has remained dead set on cutting for growth, even as the evidence piles up that cutting spending hasn’t reduced their country’s debt load. The Bank of England also chose to end its bond-buying program earlier than expected, standing pat on monetary policy at a time when easing is probably needed to backstop the costs of all that fiscal consolidation.
6) The Bank of Japan tolerated deflation. Think about this fact: Japan’s economy today is four percent smaller now than it was in 1994. The cause? Deflation, and the Bank of Japan’s unwillingness to pursue a commitment to a monetary policy that would allow it to shed some of its high debt and create better prospects for growth. While the BOJ has dithered, the Bank of Canada, US Federal Reserve, the Bank of Switzerland and the European Central Bank have adopted policies to stimulate their countries’ economies. The good news here is that Japan’s newly elected Prime Minister, Shinzo Abe, has promised to pressure the BOJ to lift the country out of its doldrums.
7) Argentina fought with the world’s investors. Under President Cristina Fernandez, Argentina has picked a number of fights with global investors that will make it harder for the country to achieve its aspirations. While the ongoing fight with its holdout creditors from its 2001 default hasn’t painted any of the players in a flattering light, the primary consequence has been to push off Argentina’s return to the global money markets and stretch its foreign financial reserves. Even more problematically, the country nationalized its largest oil company, previously owned by private investors in Spain, Argentina’s largest foreign investor. While the move may bring short-term benefits, the problems of relying on a national oil industry can be seen in Hugo Chavez’ troubled Venezuela, and it contributes to a pattern of behavior that will make investors quite leery of coming ashore in Buenos Aires.
Oh, and then there’s the US fiscal cliff. It hasn’t happened yet, and officials are optimistic that a deal will be reached to avoid what would be the biggest unforced error of 2012, a massive austerity policy imposed on an economy that doesn’t need it. If the US does hike taxes and slash spending as scheduled on Jan 1. without alleviating the effects within weeks, the country will go into a recession, diminishing the global outlook for growth.
What did we miss? Tweet your nominations for worst economic policy decisions to @quartznews and @timfernholz.