PUBLIC AFFAIRS AND MEDIA RELATIONS BLOG - Veena Hudson

The eurozone's quantum leap

Suffice to say, it has been a testing few months for the eurozone. 'What was only last Christmas a financial bushfire in Greek financial markets,' writes the Guardian, 'has grown and spread, and is now licking at the borders of Spain and Portugal.' 

When the Greek government doubled estimations of its deficit in October, the cost of servicing its debt - the 'risk' premium - rocketed. Since then, concerns that Greece and other indebted countries will default on their debts, coupled with the previous ambivalence of EU leaders over whether and how to intervene, have caused the euro's value to plummet on world markets.  

Tensions appeared to reach a head last week, with reports that French President Nicolas Sarkozy threatened to pull out of the single currency to force an erstwhile reticent Germany into agreeing a €750bn rescue package for struggling member states. In addition to this unprecedented step, the European Central Bank (ECB) has also announced that it will, for the first time, buy up eurozone countries' debt.

Yet despite an initially positive response, even gestures of this scale do not seem to have reassured traders that the situation is in hand; on Monday, the euro reached a four-year low, moving closer to parity with the dollar. Only two years ago, the euro was touted as the 'saviour of troubled economies', as the most recent intake of EU states looked to join the single currency as a means of protecting themselves against the worst of the global downturn. Now, not only has eurozone membership proved to be no panacea, controversy over the accounting practices by which Greece met accession criteria could considerably decelerate the pace of future admissions. German chancellor Angele Merkel's warning that the bailout can only 'buy time' reflects widespread acknowledgement that the euro's problems will not be solved lightly.   

Some economists believe that the real problem lies in the fact that while the ECB has control over monetary policy, fiscal policy - tax and spending decisions - is in the hands of national governments, who can act irresponsibly. This argument forms the basis of the European Commission's recent proposals that EU members should review their peers' spending plans in order to pre-empt future crises. Financial services commissioner Michel Barnier has also called for greater regulation of credit rating agencies, whose downgrading of Greece's debt status to 'junk' served to worsen the country's, and so the euro's predicament.  

ECB president Jean-Claude Trichet recently called for a 'quantum leap' in eurozone governance. When they meet again in Brussels this week, EU finance ministers must decide whether they are willing to take one.

Coalition governments

This week, David Cameron became not only the first Conservative prime minister of Britain for 13 years, but also the head of the country's first coalition government since the Second World War.

Concern has been raised that such an arrangement will prove inherently unstable and short-lived - yet so rare is a hung result in a UK general election, political pundits have little national history to draw on to substantiate this. And when looking elsewhere for inspiration, the evidence is hardly conclusive.

In Germany, for example, no single party has control of the country's parliament as of this week, when the governing centre-right CDU/FDP coalition lost control of North Rhine Westphalia, and so its majority. On face value, the fact that the arrangement struck by Chancellor Angela Merkel in September has lasted all of eight months seems to demonstrate such pacts are untenable. 

UK voices opposing the abolition of the UK's first-past-the-post (FPTP) electoral system might also point to Belgium as vindication that proportional representation (PR) results in deadlock. In January, the prime minister resigned after the Flemish liberal party withdrew from the country's unwieldy five-faction coalition after only five months. It has also been argued that the reliance of the minority government of Spanish Prime Minister Jose Luis Rodriguez Zapatero on smaller parties to pass law is fuelling ongoing market uncertainty about his ability to push through the economic reform required to prevent a Greek-style debt crisis.

On the other hand, there is a strong case that the strength of a coalition is dependent on national circumstances. Unlike Belgium and Spain - the former of which is so riven along French-Flemish lines that some commentators suggest it no longer exists as an entity - the UK has no nationalist or separatist factions on a scale that could break a government. And despite Germany's current woes, it is perhaps the previous CDU/SPD coalition, combining the centre-right with social democrats, which better reflects the new UK set-up; albeit not without problems, this lasted four years. 

Outside Europe, New Zealand perhaps provides the best indication that the view that coalitions are doomed from the outset is unnecessarily pessimistic. Though no party has formed a majority since it moved from FPTP to PR in 1996, the country has operated under various arrangements - some looser, some stronger - without descending into chaos. The Irish Fianna Fáil/Green alliance has weathered the economic storm.

The future of the UK's Lib-Con pact may be ambiguous - but it is unlikely to prove catastrophic, and will certainly be interesting.

BRICs - a new model?

Economists seem to be inordinately fond of acronyms. As the efforts of European leaders to rescue their 'PIIGS' continue this week, elsewhere eyes have increasingly turned to the BRICs - Brazil, Russia, India and China - as new movers and shakers of the global economy. 

It was Jim O'Neill, a leading economist at Goldman Sachs, who first coined the phrase ‘BRIC' in 2001. 'My basic tenet,' he has since said, 'was that if these countries embrace productivity changes that go with global trade and globalisation… they're likely to become big'. And he was right.

Accounting for one quarter of the Earth's land mass and 40% of its population, the BRICs' combined GDP represents 15% of the global economy: a figure that has doubled in 10 years, and is set to surpass the G7's share before 2040. Given also that they collectively hold over 40% of global currency reserves, the BRICs are simply too big to ignore.

On one hand, the group is notable for its heterogeneity; Brazil and India are democratic, Russia perhaps nominally, while China is a one-party state. Yet on the other hand, several factors draw them together. While their economic policies may differ, all are growth-oriented: aimed at poverty mitigation and diversification. Significantly, all have opened up their markets and weathered the recession (though Russia less strongly) without buying into full liberalisation - a fact that has led some commentators to herald the beginning of a new, post-Washington consensus.

Though their ties are ostensibly economic, moreover, the BRICs have undoubtedly begun to behave as a political entity over previous months. Following their first formal meeting in Russia in June 2009, the group of four - alongside South Africa and Mexico - jointly set out their case for the reform of the Bretton Woods institutions to better represent the developing world, ahead of the summit of G20 nations (of which they form part) last September. Meeting again in Brasilia last week, the BRICs called additionally for reform of the UN, in particular, to afford India and Brazil a seat on its prestigious Security Council. 

Ten years since he foresaw the rise of the BRICs, with economists now positing that the rise of a new N-11 will transform the global economy yet further, Jim O'Neill's call for a 'more optimal state of world governance' needs acting upon.