Democracy in America

BACK in the salad days of Gen X, when Ethan, Winona and Janeane took to the silver screen to whinge about divorce, AIDS and McJobs, it was often heard that ours would be the first generation in American history to fare worse than our parents'. When this ominous forecast of generational decline first found my ears, I refused to believe it. My faith in America's free-enterprise system was boundless. That is, if America continued to exist at all! An early-90s collaborative hypertext fiction listserv to which I belonged envisioned our future on the borderless virtual frontier as a disembodied anarchy of infinite freedom and endless innovation in which the laws of conventional economics would be suspended. The American state would become a minor protective-services franchise, as envisioned in "Snow Crash", since income would become untraceable and untaxable, thanks to Peter Thiel. Also, for some reason or other, we would have access to unlimited quantities of LSD, and Terence McKenna and Robert Anton Wilson would stop by our temporary autonomous zone and regale us with tales of worlds beyond the world as a roaring bonfire of discarded Douglas Coupland novels licked the smudged night sky like the forked tongues of a million lizards. This did not come to pass.

Nevertheless, the Clinton-era boom and the rise of a rather less fantastic internet economy laid to rest fears of Gen X's waning fortunes, and my cohort went forth into a sunlit world of stock options, companionate marriages and Netflix marathons. But then, cruel fate, it finally came to pass that Ethan, Winona, Janeane and Ben were more or less vindicated. Reality does bite. We are suffering a great stagnation. Where once I saw pathetic hand-wringing, now I see a venerable American rite of passage. Every generation must contemplate the dread prospect of faring worse than the preceding. (Logically, a few generations hence, the kids will be eating locusts and killing in cold blood for 40-year-old cans of Fancy Feast, but look away, reader, before the abyss looks also into you.) What is your glitch, America? 

This unpleasant reverie comes to you courtesy of Matt Miller, who last week upheld this proud American tradition by reminding the under-35 set that:

As many as 100 million Americans live in households today that are earning less than their parents did at a similar age. And this is happening well before we feel the full impact of global economic integration with rising economies like India and China.

According to Mr Miller, college costs too much, college grads are crushed by their student loans, the public schools produce mediocrity instead of mobility, America's economically-vital infrastructure is falling down, and nothing much is being done about any of it. Why not? Old people!  

Add it up, and what’s it all mean? Younger Americans don’t realize they’re coming of age in an era in which both parties have pre-committed virtually all public resources to seniors. They’ll inherit a government without the cash or flexibility to address emerging non-elderly needs—choices that should be every generation’s birthright. Want to help a poor child or fix a bridge? Sorry, kids, the till is empty.

Not fair! So what's to be done? Ice floes? Death panels? Mr Miller offers this instructive tale:

In 1995, when I was a (younger) generational equity worrywart, I asked then-Sen. Alan Simpson how to fix what was clearly coming. Simpson told me nothing would change until someone like me could walk into his office and say, “I’m from the American Association of Young People. We have 30 million members, and we’re watching you, Simpson. You [mess with] us and we’ll take you out.”

Simpson was right then. He’s still right now.

What?! That's it? The best last hope for America's 20-somethings is the "American Association of Young People"? That's not the most depressing thing I've ever heard, but it's close.

Mr Miller seems to me to overestimate the extent to which the prospects of rising generations depend on government spending. I would emphasise that American prospects generally depend on a return to healthy rates of economic growth, and that's not entirely or even primarily a matter of taxpayer-financed "investment" in America's human capital and physical infrastructure. That said, the economy certainly won't break out of its rut if an increasingly huge portion of GDP is consumed by health care and old-age pensions. So Mr Miller is right to suggest, as he does, that younger Americans will have little to look forward to unless it becomes politically possible to end Medicare and Social Security as we know them. But, again, how can this become possible?

The answer is... the answer is: I don't know. Oh wait: I do know. The answer is by refusing en masse, AAYP or not, to concede that a major overhaul of entitlements is somehow mean-spirited, and instead insisting that it is an utter necessity of collective prudence and generational equity. My generation and these "Millennial" youngsters both are going to have to stop being so sensitive about appearing stingy and insist that we get a fair shake, too. Listen to Winona, kids. If you ever manage to get a revolution going, don't disembowel it for a pair of running shoes, or for a pat on the head from the AARP.

Who Lost the Euro?

Illustration by Daniel Pudles

By Clive Crook

The arc of Europe’s postwar history is turning toward tragedy. It isn’t just that much of the Continent has fallen into a new Great Depression, or that in some countries things will get worse before they get better. It isn’t even that the whole mess was avoidable in the first place. It’s that the crisis is dividing Europe along the very lines the European project was intended to erase.

Decades of clichés about European “solidarity” and “the European idea” are being held up to ridicule. The notion that Greeks, Spaniards, Britons, Germans, and Italians are instinctive partners whose commonalities transcend their cultural differences and historical enmities—that “Europe” is a real community, not just a heavily worked-over blueprint in Brussels—turns out to be, let’s say, disputable. Ancient stereotypes are as livid as ever, framing conversations about the crisis right across the European Union. Germans are bossy and severe. Italians are idle. Greeks are corrupt. Brits are arrogant. The French are vain. So much for 60 years of European unification.

Until recently, Germany could claim to be expressing the consensus of rich northern Europe, but no longer. France has chosen the socialist Francois Hollande as president, ditching German Chancellor Angela Merkel’s erstwhile ally, Nicolas Sarkozy. The resolve of other northern governments to stand with Merkel in her demands for fiscal austerity in the south is weakening.

Meanwhile, resentments thought to be dead and gone have revived. Three generations after the end of World War II, newspapers in Greece publish caricatures of Merkel as a swastika-sporting Nazi. In Spain, Italy, and other countries suffering the stress of a German-directed drive to restore Europe’s public finances, anti-German sentiment is better disguised but no less widely held. Germany stands increasingly isolated in a union that was intended, not least by Germany’s own leaders, to bind and subdue the country within a larger whole.

Why did it all go wrong? Three main reasons: French grandiosity, German shame, and a universal law of bureaucratic self-aggrandizement. Together these formed a European Union that was poorly adapted to the stresses the project was sure to encounter. The EU was perhaps unlucky that the crisis came when it did—before national loyalties had diminished and an emerging European identity had begun to take their place. Yet the EU’s designers had some sense of the risk they were running. They gambled and lost.

The overriding goal for a Europe in ruins after 1945 was to create a secure zone of peace and prosperity. Reconciliation between France and Germany, formerly bitter enemies and sure to be the dominant economic entities in a new Europe, was vital. As a matter of the highest priority, the two countries formed a close alliance and began building a new, united Europe around it. They began modestly in 1951 with the European Coal and Steel Community, but they entertained bigger ambitions from the outset.

As early as 1957, the Treaty of Rome enshrined the notion of “ever closer union.” This became the organizing principle for Europe’s subsequent evolution. The path not taken was that of an enhanced free-trade area, a zone of economic cooperation among sovereign states, a kind of Nafta-plus. The architects of European integration had larger designs. If Europe was to compete and engage on equal terms with the U.S., it would need to aim higher. Ultimately, a United States of Europe was the goal.

Germany mainly wanted a broader union—to surround itself with friendly states even if the newcomers were at different stages of economic development than those at the European core. France sought a deeper political union, one that would subdue German economic power and give Paris more reach. Compromising, they chose to broaden and deepen at once. The European Economic Community expanded to take in new members. It developed a thin, yet feverishly proliferating, federal layer of government, complete with a parliament and executive. These two drives were in tension. Members of an ever-widening union had less in common than countries in the advanced-economy core, making political and economic integration ever harder.

The critical juncture was reached in talks for the Maastricht Treaty of 1992. This provided for European monetary union, the boldest step yet.

As expected, France was keen on the new single currency: This was deepening with a vengeance. Under then-existing arrangements, French monetary policy was in practice constrained by the choices of Germany’s mighty central bank. France had no vote on the Deutsche Bundesbank’s governing board, but its interests would be recognized by the European Central Bank. Back then, France saw monetary union as adding to, not subtracting from, its own monetary sovereignty.

More gloriously—and what is France for if not la gloire?—the single currency advanced the goal of a Europe fit to contend with the U.S. in global affairs. The dollar needed a rival. The euro would be it. A truly single European market, which the EU had resolved to build, needed to eliminate exchange-rate risk, and that required a single currency. What better way to incubate a European sense of identity than to create such a currency?

As before, Germany viewed deepening more skeptically. Polls told the government that, had Germany’s constitution permitted a referendum on dropping the esteemed deutsche mark, the country would have rejected the idea. But Chancellor Helmut Kohl gave greater weight to other considerations. After the fall of the Berlin Wall, the country’s enlargement to the east had stirred concern about resurgent German power. Kohl wanted to offer reassurance. This was not Deutschland über alles, you understand. There’s no going back to that shameful past—we’ll surrender the D-mark to prove it. Germany acquiesced in the annihilation of its currency out of meekness.
Yes, that’s ironic.

There was another factor, almost as laughable in hindsight. Starting in the 1970s, a view had gained ground around the world that central banking was above politics. The goal of monetary policy—price stability—is simple, according to this view, and the means purely technocratic. The old Keynesian idea that governments could trade a bit of inflation for a spurt of faster growth stood discredited. If such choices ever arose, central banking would be political; but they don’t, the thinking went, so monetary policy should be held above the fray.

That’s why Europe’s leaders weren’t too worried that the union’s democratic underpinnings, including its arrangements for fiscal policy, were so much weaker than those of a traditional, currency-issuing nation-state. Actually, they thought, this was a good thing. The EU’s governance deficit would make the ECB all the more independent. Left alone, it would be able to do its job better and without controversy.

Nice theory. One thing this crisis has proved is that central banking is a branch of politics. Under some extreme circumstances, such as those we’re in, monetary policy is just fiscal policy by other means—as when a central bank engages in “quantitative easing” and takes government debt onto its books, as the U.S. Federal Reserve has done. To underline its independence, the ECB was forbidden to do that, but out of necessity it’s lately found ways around the prohibition. Many economists are now calling for more quantitative easing in the euro zone.

In addition, with economies across the euro area diverging, the supposed simplicity of the stable-prices goal has evaporated. Price stability in Germany means depression in Greece. But the euro area can have only one monetary policy. Setting it involves choices that are as political as they come—yet no clear line of democratic accountability connects the ECB and the EU’s citizens or governments.
 
Some economists drew attention to the fragility of the euro system’s design from the start. Harvard’s Martin Feldstein presciently stressed that as economic performance differed from one country to the next, a single currency would pit winners against losers. Europe lacked both the political machinery and the democratic legitimacy to mediate these disputes.

The standoff between Germany and its allies in fiscal austerity on one side and Greece, Ireland, Spain, and the distressed peripheral economies on the other comes down to a fight about who bears what burden. German taxpayers are unwilling to further subsidize what they see as their reckless and feckless EU partners. In the end, if this reluctance brings the ceiling down, it may do Germany more harm than good. You can understand it nonetheless. And since Europe’s national solidarities look more entrenched than ever, you can also understand resentment in Greece and elsewhere at being dictated to by Berlin.

One way of describing Europe’s dysfunction is to say that economic integration, which sped up with the euro’s arrival, got too far out in front of political integration. While that’s true, you’d be wrong to conclude that political integration could have moved much faster. Successive treaties have foundered because of popular resistance to the transfer of decision-making power to the EU. Across Europe, politics is still resolutely national. To many Spaniards, Madrid, let alone Brussels, seems remote. The same goes for the citizens of most other EU member countries.

For that reason, adopting the single currency was always going to be a risk, but it didn’t need to be as risky as it proved. National governments understood what the economic demands of the euro would be, then spent more than a decade doing nothing about them. Successive Greek governments not only overborrowed but also cooked the books to hide the fact. Greece was an outlier only in the latter respect. Everywhere, complacency about the safety of sovereign debt was total. For years governments borrowed, and creditors lent, as though Greek (or Spanish or Italian) debt was as safe as Germany’s.

That bad behavior was compounded by the failure to align financial regulation with monetary union. The single currency fostered deep financial integration across the EU—that’s one of the reasons why leaving the single currency is so difficult. But progress toward a consistent EU-wide system of financial regulation—such as uniform banking rules or a single deposit insurance scheme—has been slow.

Labor markets also remain more national than continental, leaving workers and businesses at the mercy of the EU’s imperfectly synchronized business cycles. Migration is permitted in theory but can be difficult in practice because pension arrangements and labor certifications aren’t easily portable. Anyway, how many Frenchmen want to live in Britain? Or vice versa?

Until the crisis intervened, labor market craziness as notorious as Spain’s—where a dual system of permanent and disposable workers has driven the unemployment rate to 25 percent—was left unattended. Powerful unions and broken wage-setting systems allowed labor costs to get out of hand and created a widening competitiveness gap between Germany and southern Europe. This is the main underlying cause of the peripheral countries’ current plight.

The EU’s executive arm, the European Commission, is much to blame for this neglect. For years it focused on enlarging and complicating its areas of competence, but it failed to prioritize the issues that would make or break the currency union. Its pathological zeal to standardize the regulation of products and services fueled resistance to more rule from Brussels—resistance the commission then deflected by spraying regional development funds hither and yon. Its intrusiveness contrived to be both threatening and absurd. The commission thrived on tasks that neither made the euro system safer nor prepared the EU for the economic stresses of the crash.

The result is the fateful choice that confronts Europe in the coming days and weeks. Already a breakup of the euro system has gone from being “unthinkable” to a contingency for which officials are planning. The immediate question is whether Greece will exit. Europe’s leaders would hope to stop the rot there. But if Grexit happens, attention will turn instantly to which country goes next. To stop the system from unraveling with who knows what consequences, the EU may have to take the strides toward deeper union that Germany has been resisting since this crisis exploded: joint guarantees of sovereign debt and unlimited intervention by the ECB.

That’s fiscal union. It commits the EU to potentially enormous transfers among its members and makes them explicit. Can there be fiscal union of that sort without political union? And do Europe’s divided nations—the bossy Germans, idle Italians, arrogant Brits, and vain French—actually want to be one country? In Maastricht in 1992, the Treaty on European Union arranged things so those questions would one day have to be answered. Sooner than anyone bargained for, and before Europe was anything like ready, that day has come.

The Creative Economy

THE 21ST CENTURY CORPORATION

Which companies will thrive in the coming years? Those that value ideas above all else

Adam Smith, the arch-capitalist, didn't like corporations. He wrote in 1776 in The Wealth of Nations that they breed ''negligence and profusion'' and ''scarce ever fail to do more harm than good.'' In his day, governments handed out corporate charters rarely and grudgingly. But a century later, as the required scale of enterprise grew, corporations came to the fore. They built railroads, steel mills, refineries, and other businesses of unprecedented size. In so doing, they played an indispensable role in what University of California at Berkeley economist J. Bradford DeLong calls the ''central fact'' in 20th century economic history: the greatest increase in material wealth ever.

Now the Industrial Economy is giving way to the Creative Economy, and corporations are at another crossroads. Attributes that made them ideal for the 20th century could cripple them in the 21st. So they will have to change, dramatically. The Darwinian struggle of daily business will be won by the people--and the organizations-- that adapt most successfully to the new world that is unfolding.

This Special Double Issue is an attempt to peer into the future to describe the look and feel of 21st century corporations. We draw on the insights of CEOs, venture capitalists, academics, consultants, and, of course, the cubicle dwellers who do the work. We look at management via the Web, the workplace of the future, the battle for talent, the ecosystem in which corporations will exist, job titles of the future, and much more. Our aim is to provide readers with insights that could help their own companies thrive in the decades ahead.

VIRTUAL VALUE. Let's start with the most important force of all: the growing power of ideas. In Adam Smith's time, most people worked on farms. Later, industry was ascendant. But the advanced economies have gotten so efficient at producing food and physical goods that most of the workforce has been freed up to provide services or to produce abstract goods: data, software, news, entertainment, advertising, and the like. You can see it in the statistics. The share of U.S. capital spending devoted to information technology has more than tripled since 1960, to 35% from 10% (chart). Fields such as biotechnology are booming. The U.S. Patent & Trademark Office hands out 70% more patents--about 170,000 last year--than it did just a decade ago.

People are cranking out computer programs and inventions, while lightly staffed factories churn out the sofas, the breakfast cereals, the cell phones. The physical content of the gross domestic product seems to be vanishing like Lewis Carroll's Cheshire cat. Although the U.S. is still often called an industrial economy, the Bureau of Labor Statistics projects that by 2005, the percentage of workers employed in industry will fall below 20%, the lowest level since 1850. And the long lull in productivity growth seems behind us. If productivity increases 3% a year--below its recent rate--the average output per hour of work will double in 25 years. That will translate directly into higher living standards.

The turn of the millennium is a turn from hamburgers to software. Software is an idea; hamburger is a cow. There will still be hamburger makers in the 21st century, of course, but the power, prestige, and money will flow to the companies with indispensable intellectual property. You can see it already. At the end of last year, Microsoft Corp. (MSFT), with just 31,000 employees, had a market capitalization of $600 billion. McDonald's Corp. (MCD), with 10 times as many employees, had one-tenth the market cap. Or take Yahoo! Inc. (YHOO)--a virtual place in a virtual medium, the Internet. Although far below its peak price, Yahoo trades at more than 40 times book value. If USX Corp.'s U.S. Steel Group (X) traded at the same multiple to book as Yahoo, its market capitalization would be nearly $90 billion, instead of less than $2 billion.

In an economy based on ideas rather than physical capital, the potential for breakaway successes like Yahoo is far greater. That's because ideas, like germs, are infectious. They can spread to a huge population seemingly overnight. And once the idea--say, a computer program--has been developed, the cost of making copies is close to zero and the potential profits enormous.

With the possibility of gargantuan returns, it's no wonder that idea-based corporations have easy access to capital. The pool of investable money has been swollen by the rising tide of wealth around the world, coupled with a new culture of investing. U.S. companies received nearly $50 billion in venture capital last year, 25 times as much as in 1990. The amount of money raised in U.S. initial public offerings last year, nearly $70 billion, was 15 times the amount in 1990. Both records are certain to be broken this year.

The sheer abundance of capital could be bad for the capitalists themselves, including ordinary investors in the stock market. That's because the commodity they supply--money--is no longer scarce. What's scarce are the good ideas. Thus, shareholders are likely to lose some power in the 21st century, while entrepreneurs and idea-generating employees gain it. Huge bonuses and option grants to key employees are early evidence of the trend. Raghuram Rajan, an economist at the University of Chicago's Graduate School of Business, says it may be time to rethink the conventional wisdom that shareholders are entitled to all the profits of a corporation. Charles Handy, the British author of The Age of Unreason, even suggests that some corporations might become more like voluntary associations, run for the benefit of their working ''members.''

''FIGHTING ISSUE.'' The rising importance of ideas creates all kinds of difficulties for corporations. Books, music, and software are devilishly difficult to create--and diabolically easy to copy. China, for instance, is a counterfeiting machine. And now so is the Internet, thanks to services that enable people to download music, movies, and software for free. The legal battle over the biggest of the music piracy havens, Napster Inc., is a sign of things to come.

Theft of intellectual property is lethal to innovation. Yet overly strict enforcement of intellectual-property protections can dampen innovation as well by letting the property owners get lazy. Chuck D, the lead rapper for Public Enemy and a supporter of Napster, complains that record companies often buy rights to songs and then let them languish. To keep the Creative Economy growing, governments will have to strike a delicate balance: enforce patents, copyrights, trademarks, and noncompete clauses to preserve incentives to create, but not so much that it suppresses competition. ''Intellectual property is going to be the big fighting issue'' of the coming decades, predicts Lester C. Thurow, a Massachusetts Institute of Technology economist.

In the Creative Economy, the most important intellectual property isn't software or music or movies. It's the stuff inside employees' heads. When assets were physical things like coal mines, shareholders truly owned them. But when the vital assets are people, there can be no true ownership. The best that corporations can do is to create an environment that makes the best people want to stay.

Of course, not everyone will benefit equally from the shift to an information-based economy. High school grads' median weekly earnings are 43% less than those of college grads, far worse than the 28% gap in 1979. And education is likely to become even more essential to prosperity in the future. The five fastest-growing occupations in the U.S. are all computer-related, according to projections of the Bureau of Labor Statistics. Corporations faced with a shortage of skilled help are likely to respond through a combination of training, exporting work offshore, and looking for ways to ''de-skill'' certain jobs. Fast-food cashiers, for instance, punch buttons for food items rather than keying in prices.

A NEW MIX. A chronic shortage of skilled help will be accompanied by a change in the mix of people in the workforce. The long-term trend toward earlier retirement has recently been reversed, with more older people looking to stay at work or return. Overall, a record 67% of the adult population is employed or looking for work, mainly because female participation in the labor force has jumped to 60% from about 50% two decades ago. And the ethnic mix of the workforce is changing, partly because the great American jobs machine is sucking in immigrants. The Census Bureau projects that by 2050, 53% of the U.S. population will be non-Hispanic whites, down from 74% in 1995.

The corporations that thrive will be the ones that embrace the new demographic trends instead of fighting them. That will mean even more women and minorities in the workforce--and in the boardrooms as well. Ted Childs, who runs IBM's (IBM) global diversity program, claims there are 350,000 unfilled jobs in the U.S. information-technology industry. ''I believe we're in a war for talent,'' he says, ticking off various IBM projects to develop talent among women, blacks, Asians, homosexuals, and other groups. ''None of this is charitable.''

The 21st century may see the emergence of a kind of ''welfare capitalism,'' in which corporations try to recruit and retain employees by providing services that in another era were provided by government agencies or families: assistance with child care and elder care, valet services, and so on. Their employees will handle more personal matters at work, and more work matters at home: The man in the gray flannel suit is becoming the man in the gray flannel shirt. Even floor plans are going New Age at places like SEI Investments Co. in Oaks, Pa. Computer linkups drop from the ceiling, and employees move from place to place as their assignments change.

While some freelance workers will jump from job to job like hired guns, companies like IBM and Sun Microsystems Inc. (SUNW) want to have a core of careerists to provide continuity. ''Enduring relations with employees become an enormous asset, because those employees are what connects the company to its partners,'' says James N. Baron, a professor at Stanford University's Graduate School of Business.

And just as companies want to hang onto a core of permanent employees, they'll want to retain some key business functions in-house as well. Forget the vision of the entirely ''virtual'' corporation in which nearly everything is outsourced. Clayton M. Christensen, author of The Innovator's Dilemma, points out in an essay written for this issue (page 180) that outsourcing won't work for cutting-edge products whose specifications are in flux.

Still, corporations in the 21st century will evolve new forms of close interaction. Silicon Valley is the exemplar of a new kind of interdependence: Skilled engineers jump between companies as easily as switching desks, and as they do, they spread ideas. ''In some ways, Silicon Valley performs as a large decentralized corporation,'' Philip Evans and Thomas S. Wurster of Boston Consulting Group Inc. write in their new book, Blown to Bits.

THE REAL ASSET: IDEAS. In the same way that the economy is losing weight--software instead of steel--corporations are getting lighter, too. They're able to generate lots of revenue and profit off a small base of assets and employees. Despite the merger wave of the 1990s, the most valuable companies in America aren't bigger by employment than the most valuable companies of a decade earlier. Comparing the 100 U.S. companies by market cap in 1989 with the corresponding group in 1999, the number of employees fell 3%, while the collective market cap rose 500%, according to data supplied by The McGraw-Hill Companies' Standard & Poor's.

Some of these trimmed-down businesses may emerge as more powerful than any corporations ever have been. In the industrial past, there were natural limits to the power of a strategically placed corporation. A corporation was restricted in how many businesses, or customers, or suppliers it could draw into its sphere of influence because there were natural limits on how many could be granted access to its crucial asset--say, a railroad terminal.

But in the Creative Economy, the power to exert influence is nearly unlimited because there's no ceiling on how many people can be made to depend on idea-based assets, notes the University of Chicago's Rajan. An example: America Online Inc.'s instant-messaging system. Companies will exercise power by sharing--or withholding--crucial intellectual property.

Global corporations will try to take advantage of their transnational status to operate beyond the control of national governments. They can play governments off one another through their decisions about where to locate factories or research labs. And many use unrealistic transfer prices to shift income from high-tax jurisdictions to low-tax ones. Last year, a General Accounting Office study reported that from 1989 to 1995, an outright majority of corporations, both U.S.- and foreign-controlled, paid zero U.S. income taxes.

For all the talk of a brave new world, nation-states aren't going away in the 21st century. So it's a good bet that there will be repeated clashes between corporations and the countries--and people--that play host to them. In response to the globalization of business, governments may coordinate their efforts to regulate corporations on issues ranging from taxation to pollution.

Of course, corporations have always been easy to hate. In 1612, British jurist Sir Edward Coke complained that they ''have no soul.'' In the 1960s, Martin Luther King Jr. warned of the alienation produced by ''gargantuan industry and government, woven into an intricate computerized mechanism.'' The past year's outcries against globalization spell trouble for transnationals ranging from Coca-Cola Co. (KO) to Exxon Mobil Corp. (XON), and there's no sign they're diminishing.

Still, corporations have a way of flourishing under changing circumstances. While some will go down with the dinosaurs, the corporate form itself has a good deal of flexibility. Many corporations have already begun to adjust to the new realities of the Creative Economy--by allowing power to tilt from the sources of capital toward the sources of ideas, by embedding themselves in fertile corporate ecosystems, and by adopting codes of social responsibility to win the trust of a wary public. Legally, a corporation is a person--a person who is potentially immortal. Let's see how these ageless characters handle the next 100 years.

By PETER COY 

Business Week

Where the jobs are

May 29th 2012, 

 by The Economist online

Despite high unemployment companies say they find it hard to hire people

UNEMPLOYMENT has reached record levels in many countries. Yet more than a third of employers around the world are still having trouble filling vacancies, according to a ManpowerGroup survey of nearly 40,000 employers in 41 countries. Workers in skilled trades (electricians, plumbers, bricklayers and so on) are in shortest supply, followed by engineers and sales people. Talent shortages are most acute in Asia, particularly in Japan where an ageing population is exacerbating the problem. Only in France has the proportion of employers struggling to find appropriate talent increased significantly since last year (from 20% to 29%). In Italy, by contrast, it has halved from 29% to 14%. Overall, employers are less concerned about the impact of skills shortages than they were in 2011. This may be because companies are becoming more comfortable conducting business in an uncertain environment where talent shortages persist.

 ersist.

Economists: Greek euro exit threatens ‘deep recession’ in Malaysia

By Shannon Teoh

May 30, 2012

Supporters of the extreme-right Golden Dawn party sing the Greek national anthem during a rally in Athens May 29, 2012. — Reuters pic

KUALA LUMPUR, May 30 — A Greek departure from the euro zone would cause a second recession in as little as four years in Malaysia as the repercussions may be felt throughout the global economy, Bloomberg reported analysts and economists as saying today.

 

Economists told Bloomberg that investors are now betting on the small Mediterranean country leaving the euro zone soon.

Although Greece is only responsible for 0.4 per cent of the world economy, anxiety over the June 17 Greek elections has already helped wipe almost US$3 trillion (RM9.5 trillion) from global equities this month.

A Greek exit from the euro zone could reduce China’s expansion to 6.4 per cent this year, from 9.2 per cent in 2011, economists at China International Capital Corp (CICC) said last week.

Malaysia, along with the rest of Asia, has increased trade with China for years and the Asian giant is now its top trade partner.

But the world’s second-largest economy is cooling and a further slowdown means its consumption “cannot fill a US and EU-sized hole,” as the Wall Street Journal put it in a recent analysis of the global economy.

“A euro-region crisis would also mean a ‘renewed, deep recession would be highly likely in Hong Kong, Singapore, Malaysia, Taiwan and Korea’,” Robert Prior-Wandesforde, Singapore-based director of Asian economics at Credit Suisse, was quoted as saying by Bloomberg today.

The business wire added that “Prior-Wandesforde calculated that exports to the euro zone account for more than five per cent of total GDP in Hong Kong, Singapore, Malaysia, Thailand and Taiwan.”

Malaysia has reported a 4.7 per cent GDP growth for the first three months of the year, a third consecutive quarterly drop since it posted a 7.2 per cent increase in the second quarter of 2011.

Analysts have warned Malaysia to brace for a significant slowdown here due to rising linkages with top trade partners including China, which economists say is headed for a sixth consecutive quarterly drop in growth, with worse to come.

Chinese exports, 19 per cent of which go to the European Union, slowed unexpectedly in April. They may fall 3.9 per cent this year if Greece exits the euro, compared with a 10 per cent gain without an exit, CICC projected.

Citigroup economists, who earlier forecast chances of the departure at as much as 75 per cent, are now assuming as a “base case” that Greece will leave at the beginning of 2013, according to Bloomberg.

It also reported that Bank of America Merrill Lynch strategists estimate the euro-region’s GDP would contract at least four per cent in the recession that follows, similar to the decline after Lehman’s 2008 collapse that resulted in the global financial meltdown.

“A Greek departure from the currency would inflict ‘collateral damage,’ says Pacific Investment Management Co’s Richard Clarida, a view echoed by economists from Bank of America Merrill Lynch and JPMorgan Chase & Co.

“At worst, it could spur sovereign defaults in Europe as well as bank runs, credit crunches and recessions that may spark more euro exits,” Bloomberg reported today.

Institute of International Finance managing director Charles Dallara also told Bloomberg the cost of a Greek exit would probably exceed the €1 trillion (RM3.9 trillion) it previously estimated.

According to the financial wire, JPMorgan Chase estimates a one percentage point slump in the euro countries’ economy drags down growth elsewhere by 0.7 percentage point.

Other countries facing sovereign debt crises such as Portugal and Spain, would also incur higher borrowing costs.

“If you let Greece go you would be sending the message that being a member of the euro zone is not necessarily permanent, which could be a disaster for some countries,” Laurence Boone, chief European economist at BofA Merrill Lynch in London, was quoted as saying by Bloomberg.

The euro has dropped about five per cent in the past month against the dollar, while the cost of insuring Spanish government and financial debt reached a record high this month.

European banks alone hold US$1.2 trillion of debt issued by Spain, Portugal, Italy and Ireland, according to the Bank for International Settlements in Basel and a regional crisis would likely see them pull back the €5 trillion invested in the rest of the world.

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The euro crisis

The Greek run

It is not a good idea for Greece to leave the euro. But it is time to prepare for its departure

May 19th 2012 | from the print edition

“GREXIT” is an ugly term for what may soon become an even uglier reality: Greece’s departure from the euro zone. As fury in Athens runs up against frustration with Greek recalcitrance in the rest of the European Union, the EU’s most troubled economy could be heading out of the single currency within weeks. If Greek banks suffer a mass run, as depositors withdraw euros for fear they will be forcibly converted into new drachmas, Greece’s fate could be settled even sooner.

Greece’s ascendant politicians, particularly Alexis Tsipras, leader of the radical left Syriza party, want to repudiate Greece’s rescue deal with its European and IMF creditors. The creditors, particularly Germany, are standing firm, rightly making clear that they will not be blackmailed into repeatedly rewriting bail-outs. If in fresh elections on June 17th the objectors have a majority, as the polls suggest, and if they renege on Greece’s bail-out deal, then the world will cut off the supply of rescue funds. It is hard to see Greece then staying in the euro.

There is already a whiff of inevitability about an outcome once deemed impossible. Central bankers now openly discuss the possibility that Greece may leave. As the impossible lapses into the inevitable, a growing chorus is arguing that it is even desirable. Advocates of an exit say that Greece would gain from a cheaper currency, and that the politics of forging a closer fiscal and financial union between the euro zone’s remaining members would be easier without a country that should never have joined in the first place. But it is wrong to pretend that a Greek exit is an easy or desirable outcome. Before it is too late, Greek politicians need to be honest about what an exit implies. And Europe’s politicians need to act far more boldly to protect the rest of the euro zone in case the worst happens.

Eirexit, Porxit, Spaxit and Ixit
Start with the Greeks. Most of them want to ditch the hated austerity policies that they blame for their plight. Mr Tsipras and his colleagues are fuelling the belief that Greece can somehow avoid austerity and still stay in the euro. In fact Greeks cannot avoid austerity, either within the euro or outside it.

It is true that Greece can survive within the euro only with a gruelling downward adjustment of wages and prices, which demands painful budget cuts and structural reforms. Yet even stronger medicine would be required if Greece left the euro. Cut off from foreign funds, the country would be forced into still tighter fiscal austerity. It would need a disciplined monetary policy and bold structural reforms to retain the gains from its cheaper currency and avoid hyperinflation. Discipline and reform are not familiar concepts in Greek politics.
Moreover a chaotic Greek departure would devastate the country’s political life, because Greece would risk expulsion from the single market and perhaps even the EU itself. A place that shed dictatorship as recently as 1974 would find exclusion from Europe traumatic. For a taste of what might ensue you only need to look at the rising power of extremists such as the neo-Nazi Golden Dawn party.

If Greek voters deserve greater honesty about the Grexit, so do those in the rest of the euro zone. Greece may be a small economy, but a Greek departure from the euro, amid brinkmanship and bluster, would not be a small event. Most obviously, exit—and the subsequent default on its private as well as official debt—would cost European banks, firms and taxpayers a lot of money (see article). And that is without counting the danger of a general contagion in weak euro-zone economies.

There is no formal mechanism for leaving the single currency. As depositors and bondholders across the euro zone factor in the increased risk that their assets could also fall victim to a break-up, other countries would come under pressure. Today’s much-ballyhooed “firewall” is not nearly strong enough.

Explore our interactive guide to Europe's troubled economies

 

People strive to avoid disaster. Yet the scope for political miscalculation and financial panic means that the worst might still happen—it may even come soon. Deposits are fleeing Greek banks at an accelerating pace. If financial panic forced a Greek exit before the vote, it would wreck the credibility of pledges that banks across the euro zone are safe. As the Greek economy shrinks within the euro, the economic arguments will become finely balanced—because capital will have fled and the debt burden loom larger. As Greece’s politics is bankrupted, the siren call of populism may grow irresistible.

These dangers require urgent action. First, to prevent a mass run, the European Central Bank must be ready to flood the Greek banks with liquidity—raising the losses to European taxpayers if Greece does eventually leave. And second, to stop a Greek exit being followed by a cascading loss of confidence in other peripheral economies, the euro zone must undergo much faster acceleration towards fiscal and financial integration than most European politicians will admit.

To safeguard banks in Portugal or Spain from runs, European policymakers will have to set up some form of euro-wide deposit insurance. And to reassure investors in the sovereign-debt markets, there will have to be much quicker progress to some form of debt mutualisation among the single currency’s members. The Europeans should have started work on these things during the lull in the crisis earlier this year. Germany resisted that. Now these changes must be done in a rush.

A vote to rock democracy’s cradle
The Greek election is in effect a referendum on whether the country will stay in the euro. It is not completely without hope. A new Greek coalition which vowed to stick to the rescue deal would in fact gain some help from the rest of Europe. At the same time, with the promise of a common banking backstop and some form of Eurobonds, the euro would at last start to look as if it could survive and the dangers of contagion would fall away. And if Greece were an isolated problem, it would be much easier to nurse slowly back to health.

The financial re-engineering of Europe is a prerequisite for the euro to survive. Greece is bringing forward that moment of truth. And yet politicians, particularly in Germany, have still to accept the logic, let alone explain it to voters. The prospect of a Greek exit means they must begin to do so—and fast.

Europe in limbo

Europe’s weaker economies are in the grip of a worsening credit crunch

May 26th 2012 | London, Madrid and Rome

THE joke recounted by the boss of a large Italian bank is an old one, but it captures the moment. Two hikers are picnicking when a bear appears. When one laces up his boots to run, his friend scoffs that he can’t outrun a bear. The shod hiker retorts that it is not the bear he needs to outrun, merely his fellow hiker. “We’re sitting at the picnic with our boots still on,” says the bank boss.

As policymakers and pundits try to work out the effects of a Greek exit, banks and investors have already been taking precautions. One course of action has been to pull money out of more fragile markets. Never mind the weakest economies like Greece, Ireland and Portugal; Spain and Italy have also lost foreign bank deposits of about €45 billion ($56 billion) and €100 billion respectively from their peaks. Add in things like sales of government bonds by foreigners (see chart 1), and capital flight is probably equal to about 10% of GDP in those countries, say Citigroup analysts. Such outflows are hard to stop.

The European Central Bank (ECB) has filled this funding gap by providing liquidity to the banks. But that has in turn reinforced the second precautionary tactic: matching assets and liabilities within countries as much as possible. It is a common refrain from bankers that the euro area no longer functions as a single financial market, although that has the paradoxical advantage of making a break-up less destructive. Banks have used ECB loans to borrow from the national central banks of the countries in which they have assets; that should mean that both sides of the balance-sheet would get redenominated in the event of a euro exit.

Much of that ECB liquidity is meant to find its way into the real economy, of course. But the third precautionary technique, for both lenders and borrowers, is to hang fire while uncertainty is so high. The Economist has compiled a credit-crunch index, comprising a number of measures on everything from bank lending to the cost of buying insurance against default for banks, firms and sovereigns in the euro zone. A single index disguises big differences between weaker and stronger states, but it shows that credit is crunchier now than it was at the height of the banking crisis in 2008 (see chart 2).

Much economic activity is being strangled as a result. In Spain firms have put bond issues and asset sales on hold. Volatility makes it almost impossible to value an asset, bankers say. The Catalan government failed to sell 26 buildings in Barcelona earlier this year for about €450m because one of the bidders wanted to introduce a clause that said rents would be paid in dollars in the event of a euro break-up; the other bidder pulled out because it had been told by headquarters to hold off on deals in southern Europe.

The number of Spanish companies filing for bankruptcy climbed by 21.5% in the first quarter. Nearly a third of these were in the property or construction industries, but the rot is spreading. Alestis, an aeronautical supplier to aircraft manufacturers, filed for bankruptcy earlier this month after failing to reach an agreement with banks to refinance its debts.

The sound of credit crunching can also be heard next door in Portugal, where loans to non-financial companies fell by 5% in the first quarter compared with the same period last year, and credit to households by 3.6%. One of the conditions of the country’s bail-out programme is that banks should reduce their total loans to 120% of assets. The quickest way to do that is to avoid making loans.

Conditions are little better in Italy. The province of Varese, near Milan, is a manufacturing heartland: its factories make plastics, textiles and a range of engineering products. Once firms there griped about poor infrastructure and red tape; now the credit squeeze is their main complaint. The local bosses’ association says that 40% of firms were hit by lowered borrowing ceilings between January and March, and 15% were told to pay back loans. Banks turned down 45% of requests for new funding.

Those loans that are extended carry hefty interest rates, in part because higher sovereign-borrowing costs have a knock-on effect on banks’ funding costs. Differences in sovereign rates can be self-reinforcing, especially when German firms across the border are rivals. “A marginal northern Italian company competing against an equal company in Bavaria will go bust,” says the boss of one bank. “Then the cost of risk goes up and has to be shared by all the other small companies.”

If firms cannot borrow from banks they lengthen payment terms to their suppliers, exacerbating the credit problem, says Michele Tronconi of Sistema Moda Italia, a body representing textiles and clothing firms. Fashion is Italy’s second-largest export industry, but no sector has a higher level of non-performing loans.

This credit squeeze will have tightened since Greece’s inconclusive election this month. That further dents growth prospects: estimates by Now-Casting, a forecasting firm, suggests that euro-zone GDP will contract by 0.2% in the second quarter. That in turn risks worsening the debt dynamics of the zone’s peripheral countries at just the wrong time. Policymakers keep trying to buy time to solve the crisis, but they may be only speeding the end they are trying to avoid.

Source: The Economist