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Sunday, February 10, 2013

Leaders learning to play nice

Tony Paradiso

The old saying “I’d rather be lucky than good” resonates. Although I pen this week’s column inspired by Florida’s warm sunshine, please know that I feel the pain of my fellow New Englanders who endured the season’s largest storm.

What’s that you say? ...

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The old saying “I’d rather be lucky than good” resonates. Although I pen this week’s column inspired by Florida’s warm sunshine, please know that I feel the pain of my fellow New Englanders who endured the season’s largest storm.

What’s that you say?

Oh, right. That pain is from the triple bogey I took on the 14th hole last week. I stand corrected.

Suffice it to say that at the moment, my thoughts are not on the future but in the present, so predictions for 2013 will remain TBD. For those interested, an abbreviated list of predictions can be found on the New Hampshire Business Review website.

However, my exhaustive poolside research has yielded a couple of interesting topics that bear on 2013 and beyond. Given Europe has the greater short term potential to impact our economy, we’ll discuss that one first.

If 2013 is to be an improvement over 2012, Europe must avoid sovereign implosions, and to a lesser degree, continue on its course to create a fiscal union. For that to happen, Germany and France must play nice.

The defeat of conservative Nicolas Sarkozy by the socialist Francois Hollande created the potential for a wider philosophical rift between France and Germany. Happily, it appears that the relationship between Hollande and Germany’s Angela Merkel is one bent on finding common ground versus bickering about differences.

According to Helene Miard-Delacroix, a Franco-German relationship expert and professor at the Sorborne University in Paris, Merkel and Holland are “finding a way of working together.” In that regard, Congress should take note.

That is not to say that things couldn’t blow up at any time. They could, and the recent rise in the euro could become a trigger point. But for now, the two leaders have found more things on which to agree than to disagree.

The areas of common ground include their
dealings with Greece, growth and fiscal pacts, new oversight for euro-zone banks, and the European Stability Mechanism – Europe’s version of quantitative easing. At a recent event, Merkel and Hollande used the familiar tu or du to address each other rather than the formal vous or Sie. This may seem trite, but if the two leaders did not like each other, this subtle change would not have occurred.

Still, don’t construe my comments to mean that Europe has solved its problems. It hasn’t, but it is finding ways to chip away at them. Keep an eye on the euro. France favors a weaker euro because it has a larger trade deficit, and its industry mix is more susceptible to currency fluctuations. Conversely, the German economy is export-driven and is concentrated in less-currency sensitive products. Thus, if the euro continues to strengthen, cooperation could turn into contention.

The second topic is China. Leadership changes in China go unnoticed by most Americans but last year’s could prove more crucial than most. That’s because for China’s economy to get to the next level, it must develop a middle class.

This isn’t just important to China; it’s important to us. For our economy to remain vibrant, we must lessen our dependence on domestic consumption and leverage emerging export opportunities. China represents one of the largest export opportunities, but the size of that opportunity is directly proportional to the size of its developing middle class.

That brings us back to China’s new leaders. The next decade is pivotal to how fast and how large China’s middle class develops. With the recent publication of a plan to narrow the gap between rich and poor, the early signs are hopeful. Some might think that the publication of a plan is nothing more than symbolic, but in China symbolism matters.

For the last eight years, China’s leaders have debated how to address income inequality and in the process at least a half-dozen drafts have been produced. But none have ever been published because powerful special interests have managed to squash them. But not this time.

The proposed plan calls for the dividend paid back to the government by state-owned firms to increase from 10 to 15 percent. The amount the government allocates to social insurance also would increase from 10 to 12 percent. The minimum wage would rise from 30 percent of the average wage to 40 percent.

None of these reforms are earth-shattering, nor will they move the needle a great deal. Some estimate that China’s income distribution ranks among the most unequal so they have a long way to go. But the fact that this leadership group has taken it upon itself to offer a proposal so early in its tenure bodes well for the direction China will head in the next 10 years.

We’ll keep an eye on China to see if the plan actually goes into effect and whether the new government stays aggressive in its pursuit of a more level distribution of income. Achieving that goal could be as beneficial to our middle class as it will be to China’s.

Author, professor, entrepreneur, radio and TV commentator Tony Paradiso can be reached at tparadiso@tds.net.