Fed and Germany should send a positive message to world economy!

Increase interest-rates – today if possible! – urges the economist and key advisor of the management at Allianz. Michael Heise is not influenced by any counter-arguments of IMF and the World Bank, but rather goes against them: the central bank of America would encourage stability and the reduction of the current volatility on the markets if it increased base interest-rates by 0.25 percent as soon as possible – at today’s cabinet meeting if possible. This move would indicate that the slow, but secure increases will be coming on a regular basis in the next months and years.
The interviewee thinks that the effects refugees have on the German economy are rather advantageous than negative. He admits the crowd of migrants and refuge-seekers can cause tension in settlements; however, these will be compensated by the long-term economic benefits. Especially Germany’s economic competitiveness will be strengthened by integrating the migrants into the economy and society.

Péter Zentai: In one of your works published on an online financial-economic site, you strongly opposed the timing of IMF and the World Bank to raise interest-rate. Major global financial institutions warn Fed from increasing interest-rate. What is your opinion in this?
Michael Heise
: We are not in the same category… That is sure. However, someone has to say it out loud – what would actually calm down the markets is if we did not delay anymore: Fed has to take definite actions. The exchange-rate volatility of investment vehicles would not become more severe if the leaders of the American central bank made a decision and smartly presented to the world that ‘we are going to increase base interest rate by 0.25 percent’. By this action, along with a clear and careful statement, they could express that ‘yes, we have started raising interest-rates and will keep it increasing. The message would be that there is no need to worry about extreme actions in the coming months and 2016. I am sure, markets will appreciate it and understand the reason behind the raise and will adapt to it.

Do you think it is likely that the interest-rate raise will begin this Thursday?
I would not dare bet on it, I think there is a 50-50 chance. Many of the leaders of Fed are hesitating; they do not dare to ‘put their foot down’.

So you do not ‘buy’ the criticism of the World Bank, the IMF, and numerous other prestigious economists and investors, saying that a possible interest-rate raise would cause chaos in emerging markets.
It is clear that some key emerging economies are indeed troubled: such as Brazil and China. There has been a serious capital flight from the markets of these countries recently; a process which will not cease in the future. However, we have to see that the ‘China problem’ will remain regardless of the Fed’s decision to raise interest-rate or not, since the structural problems of the Chinese economy are originated from a completely different source. Anyway, a time when there are no possible excuses and oppositions simply does not exist: why is making a necessary decision so dangerous? Should Fed wait forever?
However, from the point of global market developments, it is quite favourable and comforting that the major operators – by the interest-rate raise – get reassured about that America, the most important national economy has arrived to the state where interest-rate raising is possible.  The responsible decision-makers at Fed believe that the global economic environment is not so severe anymore that they would have to expect for any turbulence, panic, or accelerated capital flight from emerging markets as a response to their decision. The most recent macro data indicate improvement: the data of the second quarter of 2015 show a 3.7 percent GDP increase. Unemployment data suggest that soon the number of job seeking Americans will fall below 5 percent. With such employment data – in a normal economic environment – it would be unimaginable that Fed did not feel the urge to raise interest-rates. The further fall of the unemployment rate implies the start of wage inflation. In such times, it is Fed’s duty to take actions.

You think things are all right in America. However, can we be sure about that it indeed reassures investors in Europe, and especially Asia and South America?
They have to be relieved by the other serious reason behind the Fed decision I expect that oil and energy prices are going to fall again. This is good news to every oil and energy import dependent country – except Indonesia, Malaysia, and other Latin American oil and raw material producers. It is an indicator of the expansion of global consumption – for which we already have proof -, and the strengthening of labour market, not only in America, but in the rest of the world too. These circumstances support that Fed can carefully start the interest-rate increase cycle.

However, does not the appearance of mass migration to Europe ‘ruin’ this prosperous vision? Do you have a prediction concerning the economic consequences of this process – for example in the case of Germany?
There is no doubt it is a significant and a troublesome challenge that politics has not yet prepared to deal with. The internal coordination among the EU members did not work as smoothly as before.
However, new waves of refugees are expected to arrive, and a part of them will have to be expelled – from your country too, just like from mine. The rest, however, must be admitted. I believe, it will not put a significant burden on the economy – especially on the German. This process will overwhelm small communities, cities, and towns because they are not prepared to handle such a sudden wave of so many foreigners. So this recent massive migration will certainly cause social problems but it will not generate macroeconomic tensions, even though the first phase of admission and integration and mainly the treatment for newcomers do put an enormous burden on the budget. However, this significant expenditure will – quite probably – pay off; especially in Germany, where we always have to face a constant shortage of labour – an acute problem in certain fields – rather than unemployment. Not to mention that the demography of Germany and many other developed European countries requires the integration of immigrants into the economy. Without them, prospects for stable growth are simply impossible. On the other hand, we still do not have a complete picture of those arrived, we still have not ‘mapped up’ the extent of their skills, education, their professions, and what they could do. This is for the future. However, every day we experience that major economic operators are working hard to make integration easier by expedited language and professional training. This is why I am optimist rather than pessimist about the effects of migration on the economy.

In the end, the new immigrants will increase Germany’s competitive advantage…
Based on earlier experiences, this could be the conclusion, indeed. A great number of new job seekers always limit the raising of wages; it stabilises them, if you will. This factor strengthens competition. Another noteworthy and interesting experience in Germany (and elsewhere, for example in Amercia – Ed.) is that the sudden appearance of new labour force – despite the opposing opinions – does not increase the level of unemployment, but the exact opposite: it strengthens and expands the labour market and its capacity.

Original date of Hungarian publication: September 17, 2015