March 2013: It’s politics, stupid

One of the phrases that 20 years ago helped propel Bill Clinton to the US presidency against George H. W. Bush was ‘It’s the economy, stupid.’ In the economically sombre days of 2013, substitute the word ‘politics’ and you sum up a central reason why, fully five years after the transatlantic financial crisis, the world economy, despite greater optimism in different ways in the US, China and Japan, remains becalmed. The influence of politics, too, provides at least a partial explanation for the apparent dislocation between the rude good health of financial markets all over the globe, particularly for equities, and the still sluggish state of the real economy, in particular in Europe. Political gridlock, magisterially explained by Meghnad Desai as pervading countries from Italy to India, appears to have persuaded central bankers that they must make up the difference by flooding markets with streams of easy money. Yet this equilibrium is plainly unsustainable. Sooner or later, the fragile state of politics in many parts of the world must either give way to a new phase of stabilisation or will tip over into destabilising the underlying economics. This is one reason why this year’s continuing stock market surge comes with a distinct health warning.

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