Second choice for the job is never an entirely happy position to be in, but, in many respects, Yellen is more suited to what Obama expects of the Fed than Summers.
Her appointment also comes at a critical moment for the Obama administration as it wrestles with the shutdown of some government services and the imminent threat of default. Having largely discounted this threat, dismissed yesterday by the IMF as a low-probability tail risk, markets are beginning to take it seriously, with share prices drifting lower and the yield on very short-dated Treasury bills rising precipitously. Yellen is being presented as a rare example of stability and continuity amid all the political turmoil.
Yet if Summers was objectionable to the Left, Yellen will be equally objectionable — if not more so — to many on the Right who strongly oppose the unconventional monetary policies she champions.
Despite the obvious political divide between government in the US and Britain, they are following surprisingly similar economic strategies. In Britain, David Cameron has characterised the Coalition’s approach as “fiscal conservativism in combination with monetary activism”.
Obama, too, is relying on the Fed to counter the fiscal squeeze imposed on him by the sequester, which is itself the result of a past political compromise over the budget deficit.
Unlike the UK, where the austerity programme is, in practice, quite mild and spread over a long period of time — whatever the Government’s critics might suggest — the US one is relatively severe, amounting to a fiscal squeeze of some 2.5pc this year alone. In the administration’s eyes, it needs monetary policy to stay ultra loose to fight this headwind.
Yellen can be relied upon to deliver this outcome, perhaps more so than Summers, whose thoughts on quantitative easing and other unconventional policies were never entirely clear. But, for the moment, whatever she does seems somewhat academic. If there is outright government default in the US, it will almost certainly push the world economy back into recession regardless of what actions the Fed takes.
In or out of Europe, red tape must be cut
THE subject of Europe is so divisive that even by discussing it you risk being branded a fanatic.
That’s the view of Standard Life chairman Gerry Grimstone, but it didn’t stop him tackling the issue head-on at the annual dinner of The CityUk, the group which speaks for the financial services industry.
In his chairman’s address at the Mansion House, Mr Grimstone argued that the UK must remain part of the EU and stay in the Single Market. “I do not believe the City’s pre-eminent position will survive if we lose our role as Europe’s financial capital, and I do not believe we can maintain that position if we are not part of the Single Market,” he said.
According to research by TheCityUK, the main priority of business leaders in the financial services sector is to develop and strengthen the Single Market by supporting harmonised regulatory frameworks and getting rid of unnecessary red tape. Most believe in the importance of a stable euro zone, whether or not they trade with it.
Mr Grimstone has not been the only prominent business figure to intervene in the euro debate this week, for all the supposed sensitivities around the subject.
On Tuesday, Toshiyuki Shiga, Nissan’s chief operating officer, said that the threat of import tariffs between the UK and the rest of the European Union could be an “obstacle” to the car-maker and urged Britain to remain in the single market.
But on the same day Oleg Mukhamedshin, deputy chief executive of the world’s largest aluminium producer, Rusal, told The Daily Telegraph the lack of leadership among eurozone nations was hitting investment in the region and Britain would be better off out.
Yesterday, Steve Varley, chairman of the UK arm of accountancy giant EY, offered his own views, calling for the UK to help make the European Union more competitive from within, putting it on a more level footing with rival trading blocs.
“Major countries need to reduce bureaucracy from the EU, we need to start off making it more competitive as we’re part of it,” he said.
In the wake of Angela Merkel’s election victory there are hopes of a new British-German alliance to fight this cause; meanwhile, the European Commission talks of scrapping regulations that weigh down business.
Will either come to pass? You don’t need to be a fanatic to acknowledge that, without some easing of the regulatory burden, the debate will only get more heated.