Today it became clear that the cooperation between Europe and China in the framework of the BRI can contribute both to balanced development of the partners and the risks of new challenges in the dialogue between the States-parties of the initiative. Thus, both sides of the dialog learned their lessons and mistakes and can implement new improvement in resolving the current problems and challenges in cooperation within BRI.
China is the founder and the main country of the Belt and Road Initiative. It is one of the most interested in implementing BRI country, but during period 2013 – 2020 it faced a number of challenges, which have to be resolved to fully enjoy the benefits and profits of the initiative.
Analyzing the possible challenges facing the mechanism of cooperation between China and countries of Europe, the article proposes a number of recommendations, made under the backdrop of many other conflicting realities with regard to harmonize the relation between countries-participant of the initiative, which can be implemented by Chinese side of the Initiative.
To take into account the geopolitical situation in the CEE region and establish relations with other interested countries.
Analysis of China – CEE relations has shown that the basis of bilateral cooperation is not strong enough today. China and the countries of Central and Eastern Europe belong to different civilizations, they are geographically far from each other, and after the end of the Cold War, the former ideological unity between them disappeared.
Since three-quarters of the CEE countries have already become members of the EU, following the common European foreign and security policy, China needs to balance two areas – relations with the EU and diplomacy with each country separately. Deepening ties with CEE countries is necessary to promote the “One belt, One road” initiative, but the “triangle” of China – EU – Central and Eastern European relations should be taken into account when creating a cooperation mechanisms.
For example, the EU has a strong presence in the CEE region by promoting a set of economic rules. The US maintains a military presence there. Germany considers CEE as a region of its’ traditional influence. Russia also has important geopolitical interests there.
The EU expresses doubts about the 17 + 1 format and sees it as a manifestation of China’s “divide and rule”policy. The US, through the NATO security structures, firmly controls the political and military development of 17 States. Although the US has expressed a positive assessment of the 17 + 1 format, it is constantly increasing its’ influence on Poland, the Baltic States, and the Eastern Balkans.
Because of the Ukrainian crisis, the US-led NATO bloc strengthened its control over CEE. Germany sees CEE as its “backyard” and traditional sphere of influence. The German government openly doubts the mechanism of China’s cooperation with the 17 CEE States, believing that it leads to the undermining of EU norms, which is unfavorable for European unity.
The influence of Russia in the region should not be underestimatedas well. The Central Asian and Eurasian economic space is very important for Russia, which is leading the process of economic integration and has a deep traditional influence and real interests (many countries in Central and Eastern Europe are heavily dependent on Russian energy resources).
It is also worth noting that due to historical reasons (CIS countries used to be underthe pressure from the USSR) and the current Ukrainian crisis, the CEE countries have noticeably increased their sense of distrust towards Russia. On this background, the relations of comprehensive strategic partnership between China and Russia can also cause“psychological pressure” on the countries of Central and Eastern Europe to a certain extent. Therefore, China, in cooperation with the CEE countries, needs to find common ground between the interests of the Chinese side, the European, the Russian side and the CEE countries. It is very important to properly resolve the hidden problems and contradictions affecting the trilateral relations.
When China and CEE countries cooperate within the BRI, special attention should be paid to the existing mechanisms of cooperation within CEE, internal conflicts of CEE countries where, for historical reasons, national contradictions are huge, as well as to differences in the levels of development of CEE countries.
It is worth noting that political relations between China and the CEE countries remain“relatively slow” compared to economic relations. According to the researcher, this is due to the “superiority mentality” of some CEE countries towards China on issues of the political system, human rights, religion and other values. (In particular, Poland and the Czech Republic in 2003–2009 repeatedly criticized China on human rights issues and Tibet. In December 2008, during the Dalai Lama’s visit to Europe, Polish President Lech Kaczynski and Czech Prime Minister Mirek Topolanek met with him. As a result, this forced the Chinese government to keep its distance from the CEE countries in order to avoid political risks. This blocked China’s plans to increase the status of relations with the region in the overall structure of foreign policy.
Given the fact that 17 + 1 is an extension of China – Europe cooperation and the functions of the 17 + 1 format are limited, the agenda cannot be promoted indefinitely in all important areas. In this regards, to maintain the vitality of cooperation, it is necessary to increase the strategic height of cooperation. The UN, EU and OSCE platforms can be used to address the security issues facing the CEE region.
In China – CEE – EU relations, the principle of openness in order to take advantage of the opportunities to involve a third party in cooperation should be also adhered. In the 17 + 1 format, the mechanism for attracting observers should be widely opened, inviting countries, including the EU, international financial organizations and international organizations. The EU is an irremediable influence factor, through the 17 + 1 it is possible to promote mutual cooperation between China and the EU, while actively attracting important EU members such as Germany and France to become a third party to China – CEE cooperation.
In-depth analysis and harmonization of the legal framework for EU – China cooperation in the region.
Since the laws of the CEE countries are fully aligned with the EU in many aspects, the Chinese side should strengthen its knowledge and understanding of the relevant EU laws and regulations, which is a prerequisite for promoting the 17 + 1 cooperation. It is necessary to actively study the successful experience of the best Chinese enterprises in carrying out commercial activities in CEE, fully understand the hidden rules for investment in CEE countries and identify trade barriers.
An important role can be played by “outward-looking” Chinese enterprises. When investing abroad, they should follow international norms and market laws, pay attention to the international social responsibility of enterprises with Chinese capital. It is necessary to allow Chinese enterprises to thoroughly understand the local requirements of socio-economic development, diligently increase employment, emphasize openness and inclusiveness, the spirit of joint win-win cooperation, and eliminate doubts of the CEE countries about the feasibility of cooperation with China.
Europe should also be better informed about the goals, structure and significance of the BRI, both for the region and for individual countries.
The analysis showed that despite a lot of explanatory work from the Chinese side and the signing of relevant political documents, the European region lacks understanding that the BRI initiative reaches Europe: it is often mistakenly believed that it is intended only for China’s neighbors. In this regards, within the 17 + 1 mechanism, along with reaching a practical level of cooperation, problems have emerged that reduce the interest and expectations of European countries in the initiative, which is reflected in negative reviews of the initiative in the media and the lack of interest of countries in the implementation of infrastructure projects. In particular, the difference in economic opportunities and needs for cooperation among the 17 countries makes itself felt.
It is noted that on the background of China’s rapid rise and continuous increase in its international influence, assessments of the “One belt, One road” initiative and other aspects of China’s foreign strategy are affected by geopolitics or the “Cold War mentality”.
In this regards, the CEE countries’cooperation with China causes them to fear that their influence will be weaken and that China will use economic tools to “split” the unity of the EU. Due to this the EU is trying to minimize the impact of the PRC on the CEE region by tightening budget requirements, and as a result, small countries are afraid to take Chinese investment for infrastructure projects.
To address this challenge, the article recommends expanding the joint discussion of cooperation plans with CEE and EU countries. If specific economic plans are difficult to find, partners should offer the cooperation in other areas, in order to ensure equal participation of 17 countries in the construction of the BRI, supporting the balanced development of the existing mechanism of cooperation and not allowing these countries to lose enthusiasm in the absence of“big projects” (for example, together with Croatia, partners can train specialists in EU legislation, with Slovenia – share experience in environmental protection). Thus, the legal system, culture, education, science and technology are areas through which the BRI initiative can increase visibility for small and medium-sized CEE countries. On the Chinese side, it is necessary to transmit correct information to them, promote cooperation of research centers, organize international conferences, explain the ideals and practice of diplomacy of a large state with Chinese characteristics, and form a favorable public opinion.
Support for humanitarian cooperation should be provided through special funds.
Thus, the effective financial support mechanisms for the European (especially CEE) markets is needed. The governments of some of these countries cannot provide sovereign guarantees because they have exceeded the EU’s debt limit. For this reason, the countries of Central and Eastern Europe that have joined the European Union can not take preferential Chinese loans. In Europe, interest rates are low, and interest rates on Chinese commercial loans are higher, hence they are unattractive to CEE governments and businesses. To solve this problem, the creation of the 17 + 1 investment Bank and support of the creation of a regional multilateral international financial company of 17 + 1 should be discussed, as well as the experience of international financial organizations in the CEE region, adhered to a market orientation, and financial guarantees for bilateral cooperation should be provided.
To use the “One belt, One Road” as a framework for promoting practical cooperation between China and CEE
There is a need to link Chinese proposals with development projects that a particular CEE country is concerned about. (For example, Estonia’s plans to build a shale power plant in Jordan, which were slowed down by the fall in oil prices and the subsequent financial difficulties of the Estonian energy company. In 2016 The Chinese industrial and commercial Bank allocated money for this project, which was linked to the interests of China, since the construction contractor was the Guangdong heat and power engineering company).
European experts note that a promising direction is the construction of transport infrastructure, which, according to them, is relatively backward in CEE. In this regard, the study recommends to offer the CEE new comparative advantages of Chinese HSR (high-speed railway) and rolling stock for them and port mechanisms, along with the construction of airports. This will increase the level of industrialization in CEE countries, which is currently relatively low. Offering production cooperation in advanced industries, especially HSR, it will be possible to enter the European “outpost” through the Czech Republic and other countries with Chinese technologies. In addition, it is recommended that China can participate in the development of agricultural processing in CEE countries, where agriculture occupies an important place in the national economies. In this way, Chinese enterprises can help increase employment in CEE countries, which will improve the image of China in the region.
The strengthening of financial institutions and the alignment of the line of providing loans to CEE countries.
When the small nation of Montenegro approached the EUfor help paying off a nearly $1 billion loan to China’s Export – Import Bank (EXIM), borrowed to finance the construction of a large highway project, alarm bells were raised across Europe. The request presented the EU with a problem that members of the World Bank may soon find themselves grappling with – what to do about large loans for economically unviable projects already under construction as part of China’s BRI. The European Commission ultimately decided to reject Montenegro’s request, raising fundamental questions about the EU’s willingness to reckon with BRI’s expansion.
As BRI develops, the trade imbalance between China and CEE countries may grow noticeably. If imports from these countries do not increase, their debt to China will increase, this situation will not last long and will lead to a deterioration in the terms of trade and to friction. To avoid this, targeted incentives should be granted to products from CEE countries in order to expand their exports to China.
In addressing this challenge, China needsto coordinate its economic relations with the EU, taking into account that the countries of Central and Eastern Europe are more oriented towards the EU in economy, trade and politics. Experts believe that the emerging TTIP agreement, which will bring the newest market standards and trade rules, may cause a blow to interaction with CEE countries. It will have an impact on the rules that China wants to set through the promotion of the BRI initiative, on the ability of Chinese enterprises to enter Central and Eastern European countries with investment and trade.
The possibility of “financial exhaustion” should also be taken into account, since the development of trade and economic ties with CEE through the BRI will require significant financial support. In addition to support from international financial organizations, more funds will be required from the Chinese side. Now the global economy is at a low point, China is in a period of economic transition, and the demand for money has become even greater. When deploying the BRI projects, it is impossible to exclude the depletion of finances within the country, hence partners should be prepared for the possible negative impact on the economic transition.
To strengthen humanitarian exchanges with ordinary people in CEE in order to deepen their understanding of China.
The Chinese Government should be encouraged by its EU partners to become a participant in the OECD Arrangement on Guidelines for Officially Supported Export Credits. In particular, it is recommended that, in monitoring progress towards a Comprehensive Agreement on Investment, the European Parliament seeks to ensure that China’s participation in the OECD framework is a key objective of the EU’s negotiating strategy.
An analysis of the public opinion of citizens of CEE countries showed that in many CEE countries, understanding of China is limited, and this is unfavorable for the development of cooperation. The study, in connection with the solution of this challenge, recommends opening more Confucius Institutes in CEE countries and supporting cultural dialogues within the BRI project.
Particular attention should be paid to the “greening” of China itself and BRI in particular. Thus, despite the narrative promoted by the Chinese government of a “Green Silk Road”, the environmental impact of many BRI-related projects continues to cause controversy. This includes effects on host country ecosystems and their biodiversity.
An example is the construction of a dam in the Batang Toru rainforest in Indonesia. Its construction has had devastating effects on biodiversity, leading it to be legally challenged by the Indonesian Forum for the Environment (WALHI). The World Bank, meanwhile, has refused to fund the project over environmental concerns. Yet, in March 2019, the court in North Sumatra decided the project would proceed.
Another example of environmental concerns related to BRI infrastructure project is Montenegro’s Bar-Boljare Motorway. The construction began in 2015 by the China Road and Bridge Corporation (CRBC), a subsidiary of the majority state owned China Communications Construction Company (CCCC), and is funded by China’s EXIM Bank.
Environmental concerns are specifically related to the Smokovac–Mateševo section of this project, which cuts across the Tara River, through an area protected by a UNESCO Biosphere. The most visible consequence of the project is the need for rock excavation for a motorway tunnel, but other implications, such as water pollution and illegal landfills also emerged from an investigation by the Montenegrin NGO MANS.The European Parliament and European Commission have called on authorities to share more details about the project’s environmental impact with the public.
It is also advisable that host governments start implementing more transparent bidding processes for infrastructure projects, in order to reduce environmental damage and increase long-term net benefits. On the other hand, in order to assess the environmental sustainability of projects with more accuracy and transparency, banks involved in financing the BRI should rely on third party reports, rather than those produced internally.
In order to improve transparency, it would be useful for the Chinese government to create a public portfolio of BRI-related projects, which would make it easier to verify to what extent they are environmentally sustainable. China does not directly operate as a unified actor in BRI-related infrastructural projects, but different actors such as State-Owned Enterprises (SOEs) and banks contribute to the realisation and funding and these should be made to comply with environmental standards.
These implications are especially relevant on a global level as well. The COVID-19 pandemic should arouse awareness about the scale of the consequences that phenomena such as deforestation and habitat fragmentation have on our planet and lives. As underlined by a recent Stanford University study, deforestation and landscape fragmentation have been recognised as facilitating direct transmission of zoonotic infections, including the risk of pandemics.
To sum up, it is worth noting that althoughit is extremely difficult to implement these recommendations in practice, however, China started to implement them even before the official start of the initiative. Thus, their gradual implementation can in the near future eliminate the negative consequences of the problematic areas in the PRC – CEE – EU relations and reduce the risk of its inflaming.
The Monetary Policy of Pakistan: SBP Maintains the Policy Rate
The State Bank of Pakistan (SBP) announced its bi-monthly monetary policy yesterday, 27th July 2021. Pakistan’s Central bank retained the benchmark interest rate at 7% after reviewing the national economy in midst of a fourth wave of the coronavirus surging throughout the country. The policy rate is a huge factor that relents the growth and inflationary pressures in an economy. The rate was majorly retained due to the growing consumer and business confidence as the global economy rebounds from the coronavirus. The State Bank had slashed the interest rate by 625 basis points to 7% back in the March-June 2020 in the wake of the covid pandemic wreaking havoc on the struggling industries of Pakistan. In a poll conducted earlier, about 89% of the participants expected this outcome of the session. It was a leap of confidence from the last poll conducted in May when 73% of the participants expected the State Bank to hold the discount rate at this level.
The State Bank Governor, Dr. Raza Baqir, emphasized that the Monetary Policy Committee (MPC) has resorted to holding the 7% discount rate to allow the economy to recover properly. He added that the central bank would not hike the interest rate until the demand shows noticeable growth and becomes sustainable. He echoed the sage economists by reminding them that the State Bank wants to relay a breather to Pakistan’s economy before pushing the brakes. The MPC further asserted that the Real Discount Rate (adjusted for inflation) currently stands at -3% which has significantly cushioned the economy and encouraged smaller industries to grow despite the throes of the pandemic.
Dr. Raza Baqir further went on to discuss the current account deficit staged last month. He added that the 11-month streak of the current account surplus was cut short largely due to the loan payments made in June. The MPC further explained that multiple factors including an impending expiration of the federal budget, concurrent payments due to lenders, and import of vaccines, weighed heavily down on the national exchequer. He further iterated that the State Bank expects a rise in exports along with a sustained recovery in the remittance flow till the end of 2021 to once again upend the current account into surplus. Dr. Raza Baqir assured that the current level of the current account deficit (standing at 3% of the GDP) is stable. The MPC reminded that majority of the developing countries stand with a current account deficit due to growth prospects and import dependency. The claims were backed as Dr. Raza Baqir voiced his optimism regarding the GDP growth extending from 3.9% to 5% by the end of FY21-22.
Regarding currency depreciation, Dr. Baqir added that the downfall is largely associated with the strengthening greenback in the global market coupled with high volatility in the oil market which disgruntled almost every oil-importing country, including Pakistan. He further remarked, however, that as the global economy is vying stability, the situation would brighten up in the forthcoming months. Mr. Baqir emphasized that the current account deficit stands at the lowest level in the last decade while the remittances have grown by 25% relative to yesteryear. Combined with proceeds from the recently floated Eurobonds and financial assistance from international lenders including the IMF and the World Bank, both the currency and the deficit would eventually recover as the global market corrects in the following months.
Lastly, the Governor State Bank addressed the rampant inflation in the economy. He stated that despite a hyperinflation scenario that clocked 8.9% inflation last month, the discount rates are deliberately kept below. Mr. Baqir added that the inflation rate was largely within the limits of 7-9% inflation gauged by the State Bank earlier this year. However, he further added that the State Bank is making efforts to curb the unrelenting inflation. He remarked that as the peak summer demand is closing with July, the one-way pressure on the rupee would subsequently plummet and would allow relief in prices.
The MPC has retained the discount rate at 7% for the fifth consecutive time. The policy shows that despite a rebound in growth and prosperity, the threat of the delta variant still looms. Karachi, Pakistan’s busiest metropolis and commercial hub, has recently witnessed a considerable surge in infections. The positivity ratio clocked 26% in Karachi as the national figure inched towards 7% positivity. The worrisome situation warrants the decision of the State Bank of Pakistan. Dr. Raza Baqir concluded the session by assuring that despite raging inflation, the State Bank would not resort to a rate hike until the economy fully returns to the pre-pandemic levels of employment and production. He further assuaged the concerns by signifying the future hike in the policy rate would be gradual in nature, contrast to the 2019 hike that shuffled the markets beyond expectation.
Reforms Key to Romania’s Resilient Recovery
Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.
Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.
The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.
Yet the road ahead remains highly uncertain, and Romania faces several important challenges.
The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.
Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.
Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.
The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.
How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?
Reforms in several key areas can pave the way forward.
First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.
Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.
Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.
Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.
Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.
None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.
Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.
I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.
First appeared in Romanian language in Digi24.ro, via World Bank
US Economic Turmoil: The Paradox of Recovery and Inflation
The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.
The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.
The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.
Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!
Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.
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