A Global Perfect Storm

Dark, lowering financial and economic clouds are, it seems, rolling in from every direction: eurozone, United States, China, and elsewhere. Indeed, global economy in 2013 could be a very difficult environment in which to find shelter. For starters, the eurozone crisis is worsening, as euro remains too strong, front-loaded fiscal austerity deepens recession in many member countries, a credit crunch in the periphery and high oil prices undermine prospects of recovery. Eurozone banking system is becoming balkanized, as cross-border and interbank credit lines are cut off, capital flight could turn into a full run on periphery banks if, as is likely, Greece stages a disorderly euro exit in the next few months. Moreover, fiscal and sovereign-debt strains are becoming worse as interest-rate spreads for Spain and Italy have returned to their unsustainable peak levels. Indeed, the eurozone may require not just an international bailout of banks (as recently in Spain), but also a full sovereign bailout at a time when eurozone and international firewalls are insufficient to the task of backstopping both Spain and Italy. As a result, disorderly breakup of the eurozone remains possible. Farther to the west, US economic performance is weakening, with first-quarter growth a miserly 1.9%, well below potential. And job creation faltered in April and May, so US may reach stall speed by year end. Worse, the risk of a double-dip recession next year is rising: even if what looks like a looming US fiscal cliff turns out to be only a smaller source of drag, likely increase in some taxes and reduction of some transfer payments will reduce growth in disposable income and consumption. Moreover, political gridlock over fiscal adjustment is likely to persist, regardless of whether Barack Obama or Mitt Romney wins November’s presidential election. Thus, new fights on the debt ceiling, risks of a government shutdown, rating downgrades could further depress consumer and business confidence, reducing spending and accelerating a flight to safety that would exacerbate fall in stock markets. In the east, China, its growth model unsustainable, could be underwater by 2013, as its investment bust continues and reforms intended to boost consumption are too little too late. A new Chinese leadership must accelerate structural reforms to reduce national savings, increase consumption’s share of GDP; but divisions within the leadership about pace of reform, together with likelihood of a bumpy political transition, suggest reform will occur at a pace that simply is not fast enough (…..)

Link: http://www.economonitor.com/nouriel/2012/06/15/a-global-perfect-storm/

Acerca de ignaciocovelo
Consultor Internacional

2 Responses to A Global Perfect Storm

  1. The head of the European Central Bank and other euro zone leaders worked on Saturday on a grand vision for the euro zone meant to reassure investors and allies that flaws in the currency union will be addressed quickly. The plan will include measures to prevent bank runs and reduce what has become a vicious cycle of government debt problems turning into banking crises, as has happened in the past two years. In addition, the plan will push for countries to remove the regulations and layers of bureaucracy that inhibit competition, keep young people out of the work force or make it difficult to start a new business. The goal would be to make the euro zone less vulnerable to crises and better able to grow its way out of the current debt crisis. But it is unclear whether yet more pledges of reform, which would face significant hurdles, will calm financial markets. Mario Draghi, the president of the central bank and one of the authors of the plan, said Friday that it would be unveiled within days, ahead of a meeting of European leaders at the end of June. Under the plan, euro zone leaders will seek to establish the central bank as supreme bank regulator with broad powers, in place of the relatively toothless European Banking Authority. Countries would also create a deposit insurance program to augment national programs. The goal would be to reassure ordinary depositors and prevent bank runs, an imminent danger in Spain as well as Greece. But any sharing of financial burdens almost automatically encounters opposition in Germany. For example, Mr. Draghi has not advocated pooling euro zone debt into common bonds, an alternative that Germany rejects, at least for the near term (…..)

    http://www.nytimes.com/2012/06/17/world/europe/european-leaders-present-plan-to-quell-euro-zone-crisis.html

  2. As China heads toward a once-a-decade change of its top leadership, its vaunted embrace a generation ago of markets and economic openness — which catapulted the country from isolated poverty to its place as a global export powerhouse — is also at a turning point. After nearly a decade of President Hu Jintao’s focus on strengthening the state, a broad consensus of Chinese economists says the country is overdue for another big push to encourage private enterprise and to foster a shift toward a more consumer-driven economy. The challenge, they say, is turning back China’s domineering state sector. But that seems increasingly unlikely. Publicly controlled enterprises have become increasingly lucrative, generating wealth and privileges for hundreds of thousands of Communist Party members and their families. And in a clear sign of its position, the government has moved to limit public debate on economic policy, shutting out voices for change. While political reform has always been a taboo topic in China, in economics, from the late 1970s to the early 2000s, almost anything went, with powerful voices backing strong measures that challenged the status quo. But now, despite the rise of social media, fewer prominent voices within China are able to make the case for a systemic overhaul that would prepare the nation for long-term prosperity on sturdier foundations. “It’s not a good time to speak out for reforms, but it’s a good time to speak out against them,” said Li Shuguang, a professor at the China University of Politics and Law. “The government doesn’t encourage debate.” Few people illustrate this conundrum better than Zhang Weiying, a 53-year-old Peking University professor who is probably the closest China has to an economic dissident. A cause célèbre in Chinese economics circles, Mr. Zhang was fired a year and a half ago from his post as dean of the university’s Guanghua School of Management. Since then, he has been on an extended sabbatical, traveling widely and giving speeches on the country’s brewing economic troubles, among them slowing domestic growth and a collapse of financing for private enterprise. The hitch is that much of his work is deliberately hard to access or is consigned to secondary publications. Last year, he gave an hourlong video interview to the Web site Sina. Although the site belongs to a publicly traded company listed on Nasdaq, Sina works closely with the Chinese government. After a week on the site, the interview was deleted. A Sina spokesman, who refused to give his name, said the video was removed as part of regular site maintenance. Similar interviews from more mainstream experts, however, are still available (…..)

    http://www.nytimes.com/2012/06/17/world/asia/in-shift-china-stifles-debate-on-economic-change.html

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