Pimco’s El-Erian: ‘Messy Politics’ to Drive Economy

Friday, 04 Jan 2013 08:09 AM

By Michael Kling

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“Messy politics,” as demonstrated in the last-minute dodging of the fiscal cliff, will drive the economy in 2013, predicts Mohamed El-Erian, CEO and co-chief investment officer of PIMCO, in an article run for Project Syndicate.

Unless Congress becomes more cooperative, political polarization will fuel uncertainty, make budget talks more difficult and hamper economic growth, El-Erian says.

"From stymieing medium-term fiscal reforms to delaying needed overhauls of the labor and housing markets," he states, "congressional dysfunction would keep U.S. economic performance below its capacity; over time, it would also eat away at potential output."

Editor's Note: The Final Turning Predicted for America. See Proof.

Expect politics to also drive the economies in many other countries, and look for world politics and economics in 2013 to be more heterogeneous, with no unifying political themes and different economic speeds posing a range of different possibilities, he advises.

In some countries, economics will have a greater impact on politics, El-Erian writes. For instance, the credibility of China's new leadership depends on its economy achieving a soft landing. A prolonged period of sub-7 percent growth may prompt opposition and dissent.

A change of leadership in Germany, the strongest economy and paymaster for the eurozone, would raise questions about the monetary union's prospects.

In Italy, the question is whether the next government will keep its current course or shift to something less acceptable to Germany and the European Central Bank.

Economic and political stability in the United States, China and Germany is essential for the world to fully recover from the 2008 financial crisis. At this point, he observes, the three major economic powers seem to be prepared to anchor the world economy in 2013.

"The bad news," El-Erian writes, "is that their anchor may remain both tentative and insufficient to restore the level of growth and financial stability to which billions of people aspire."

Congress needs a kick its bad habits to break its political gridlock, writes Susan Battley, a consultant specializing in leadership and boardroom effectiveness, for the Huffington Post.

Congressmen have shown behaviors — including denial, passive-aggressive behavior and blaming — that have become ingrained and automatic. These bad habits distort reality, make partisan victory more important than the long-term national good and damage their credibility.

To break the gridlock, she argues, they must acknowledge the habits and embrace problem solving and compromise.

"This prescription for change,” Battley writes, "will be difficult and time consuming to achieve. It will require commitment, courage and a conscious rejection of current behavioral values and norms in Washington as toxic and unacceptable."

Editor's Note: The Final Turning Predicted for America. See Proof.

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