Obama must manage “complex” economic situation

Keystone

In addition to the wars in Iraq and Afghanistan, the ailing United States economy is one of the main concerns of US President-elect Barack Obama.

Geneva economics professor Cédric Tille tells swissinfo that Obama was elected to defend the interests of the US and this he will do, while favouring a more multilateral approach than the outgoing administration.

Tille is a former staff member of the US Federal Reserve and a professor at the Graduate Institute of International and Development Studies in Geneva.

swissinfo: Is the election of Barack Obama good news for the world economy?

Cédric Tille: Yes. The main argument for that is the team that will be behind him. During his campaign he had a broad team of very good advisers. For example, Paul Volcker, former chairman of the Fed, who managed to defeat inflation in the 1980s, and Bob Rubin and Larry Summers, the two Treasury Secretaries under Bill Clinton. Summers could in fact return to this post. The John McCain team was more limited and its members were less known.

The challenge for a president today is to manage a situation that is both complex and in constant change. He must call on a wide range of advisers, put all the ideas together and then come up with the essentials. Obama is more capable of doing this than McCain would have been.

swissinfo: Obama’s slogan was “change”. What is he going to change with the economy?

C.T.: At the structural level, one of the main changes will be the US’s financial landscape. The crisis showed that the existing regulatory structure is no longer appropriate. That doesn’t necessarily mean that there needs to be more regulation everywhere. There needs to be a set of rules more aligned to the evolution of the financial markets.

In the US, several offices [the Fed and the Treasury] work in parallel. In view of this, you have to streamline, even if it means adopting a model similar to Britain where one body watches over the entire financial sector. This model is no cure-all because we still saw the bankruptcy of Northern Rock, but it is more efficient.

We shall therefore see a structural change, which will be delicate for Obama to manage. With a strong Democrat majority in Congress, he will feel a very strong pressure to “over regulate”. Once the crisis is over, Wall Street will move in the opposite direction. Obama will have to try to find a balance and that will not be easy.

swissinfo: Does he have some solid levers to be able to do this?

C.T.: For structural regulations, yes, because he has a very strong majority in Congress. In the short term, he has to continue to stabilise the financial markets. Faced with inflation I expect a fiscal boost with a temporary rebate on household taxes.

To solve the mortgage problem, it’s possible that he will turn to plans directly targeting borrowers and the renegotiation of mortgages. And that ultimately would be in the interest of lenders and borrowers. It would avoid a situation of foreclosures that would otherwise result in very sizeable costs.

swissinfo: How is he going to act at the international level?

C.T.: Central banks are cooperating very closely in the face of the financial crisis. But cooperation would also be possible with a plan to boost the economy in Europe and the US. For the time being, I don’t see it happening with the help of a supranational institution but rather in an informal way.

swissinfo: The Democrats are rather protectionist. What can we expect concerning free trade and the negotiations [on liberalising trade] at the World Trade Organisation?

C.T.: Here I see a risk. The Democratic Party is very broad. With its very powerful majority in the House of Representatives and Senate there’s a risk that extreme party forces will gain the upper hand. We would then see a party favouring protectionism, egged on by representatives of the grim “Rust Belt” [the industrial region of the northeast of the country].

Another party bloc that supports Bob Rubin is more aware of the risks that protectionism would spread to the world economy. A trade war would only aggravate a global recession. This bloc will try to resist pressures but the risk factor is very real. Obama will have to hold certain fringe sections of the party in check or expect the situation to backfire on him in two to four years.

swissinfo: The Swiss government has been trying for several years to have closer trade ties with the US. In view of that, is Obama good news for Switzerland?

C.T.: I don’t really see obvious differences between Republicans and Democrats when it comes to free trade with Switzerland. The coming weeks will tell us more.

swissinfo: As far as taxation and banking secrecy are concerned, will Obama exert stronger pressure on Switzerland, as he has intimated?

C.T.: Not necessarily. UBS has been in conflict with the American tax authorities over the past months and some Congress committees devoted meetings to the issue. I don’t think pressure will ease, and it’s not clear whether the Democrats will increase it substantially.

In fact it’s not certain that the issue is a priority. The first priorities are the strong recession that has been forecast and the ongoing financial crisis. Questions on international taxation are of relatively secondary importance.

swissinfo: Will the US be less indebted in four or eight years?

C.T.: As far as the budget is concerned, with the [economic] revival plan debt will increase. But it’s worth noting that when you compare it with the country’s economy, the level of public debt is not so alarming. It’s much higher for example in Italy or Japan. The US is not on the brink of bankruptcy – far from it.

Once the recession is over, structural changes regarding taxation will nevertheless be necessary to deal with the structural deficit which has set in under the Bush administration and which is not tenable.

The external deficit has substantially slowed down over the past two to three years. The US can sustain a small trade deficit and this will be even smaller over the next few years as a result of the marked economic slowdown. When the consumer stops buying imported products, the problem solves itself.

swissinfo-interview: Pierre-François Besson

Switzerland-United States

The United States is Switzerland’s main trading partner outside Europe.

Swiss exports reached SFr18.4 billion ($15.63 billion) in 2007, while US imports totalled SFr9.3 billion.

The US is the main destination for direct Swiss investments.

The two countries in 2006 set up the Swiss-US Trade and Investment Cooperation Forum.

In 2007 the Swiss colony in the United States totalled 73,978 people.

Switzerland and Obama

President-elect Barack Obama and two other senators are behind a draft law called the “Stop Tax Haven Abuse Act”, a 68-page document that blacklists Switzerland and more than 30 other countries.

The plans foresee widening the powers of the US economic and finance ministries as well as the Internal Revenue Service (IRS) to investigate and punish tax evasion from countries the US considers tax havens.

One of the sanctions in the text would prohibit all foreign banks involved in tax evasion from introducing credit cards on the US market.

The text includes a list of 34 countries, including Switzerland, which are considered as “probable tax evasion locations” in the eyes of the IRS.