The 45th annual meeting of the World Economic Forum kicks off at Davos tomorrow in Switzerland. The three-day long event will be attended by 2500 delegates from 140 countries from business, non-government organisations and social groups including Chancellor of Germany, President of France and PM of China. The Indian delegation will be led by the finance minister Arun Jaitley.The topic for this year is the "Global Context” and one of the key talking points will be the ECB's future action. The delegates will also discuss several other issues including economic growth, social inclusion and climate change concerns. In an exclusive conversation with CNBC-TV18’s Menaka Doshi, Nobel Laureate Edmund Phelps said that he sees Europe and Russia as the weak spots in the global economy but he's keeping his fingers crossed.
“For me the greatest challenge is Europe and I shouldn't have forgotten Russia. Russia, of course, is another scary factor in equation. But, I look to change it to being stable and continuing to grow at a very moderate rate until it settles, until it solves some of its, until it gets over some of its structural hurdles. After that it may pick up again. So, I don't think that the global economy is in all that bad shape. On the whole I think the main problems are in Europe and Russia, Phelps added.However, Nariman Behravesh, chief economist, IHS says that Europe is not the only problem area. He says China may also throw up a scare or two over the next few months.
“First is the euro zone whether or not they can sustain any kind of growth and especially what the European Central Bank’s going to do but then very importantly, China's wealth. If you look at the annualised growth rate of China in the fourth quarter it’s 6.1 percent which is very weak. So, the concern is whether it is at the bottom or will it continue to decelerate some more,” said Behravesh.
Below is verbatim transcript of their interviews with CNBC-TV18
Edmund Phelps Nobel Laureate
Q: Would you say we are finally out of the woods?
A: We are deep in the woods right now and hoping we won't go deeper. If Europe can pull itself together and we can all reasonably hope for that and if Russia will see the wisdom of behaving better in the world and in the global market place then that would also help to pickup things.
Q: I want to know if monetary policy action in Europe, the ECB is expected to announce a quantitative easing programme this week, can it fix Europe's problems?
A: We all hope it would do some good but certainly it can't fix the underlying problems of week business investment which is very much tied to almost a very low level of indigenous innovation in Europe.
There is just no basis for high prosperity there. High prosperity cannot be created by monetary policy alone. Monetary policy can only make sure that it doesn't get in the way.
Q: How can India build a stronger economy? We have a combination of factors, a new government, young people, hopefully an economic recovery in India and the fact that the rest of the world is not looking so good, so may be we can sort of claim our spot in the sun.
A: About India I am reminded as I am so often and as I wrote about it extensively in my book, I am reminded of the American case.
What I think produced sensational innovation in America between 1830 and 1940 and to some lesser extent afterwards was that everybody was involved in innovating, everybody was thinking about is there some way we can make this device more cheaply or is there some way we can improve on it or is there some way of doing this that is radically different that would be better. There was a spirit of enquiry, of experimentation, a spirit of trying to imagine new possibilities, a spirit of exercising creativity, I think to some extent that could happen in India too.
Nariman Behravesh, Chief Economist, IHS
Q: What will the ECB do this week and will it be effective in helping Europe fight the deflation problem?
A: Our best guess is that ECB will launch about 500 billion euro bond buying program. That is good but it is not enough. In the end the ECB will have to do much more than that but it is a good start. So, it will help. So, from that perspective it is good for a step is the way to describe.
Q: Will it help Europe fight deflation?
A: It will help.
Q: Will they have to do multiple versions of this?
A: They will at least have to do another round a little later in the year to make sure and guarantee that we don’t slip back into deflation but it is a start. It is a good start, assuming they do it of course.
Q: What will that mean for currency volatility across the world?
A: It will mean a weaker euro and correspondingly stronger dollar. So, that is in the cards and there is certainly a distinct possibility that we could see parody between the euro and the dollar sometime in the next few months. We are headed in that direction, so it is entirely possible.
Q: What does it mean for both the economies, what does it mean for countries like India that do trade with Europe as well as the US?
A: In terms of US dollar it will certainly hurt exports a bit but the good news is US can afford that. It is growing strongly, so, stronger dollar is not going to hurt very much. But this is a lifeline for Europe. A weak euro is desperately what Europe needs. So, in that sense it is a good way to rebalance growth a little bit from the US to Europe.
Q: What do you make in terms of the impact that Central Bank divergence will have?
A: The logical it will have is a stronger dollar, weaker euro, weaker yen and in the case of India certainly assuming this recent cut that we had is the first of many will probably mean a slighter weaker rupee as well.
Q: Do you think India looks in a better position at the beginning of 2015 than it has in the last few years?
A: We are very optimistic about India. We think it will grow probably 6.5 percent this fiscal year and is set to grow a little faster than that in subsequent years. We are in this ironic situation where in the next few years you could actually see faster growth in India than in China.
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