What's In Store For The Global Economy?

By John Terrett 
On Fri, 2011-12-30 17:24. 
Courtesy Of "Al-Jazeera"

As the year turns, what's in store for the global economy?

Europe's on the threshold of recession. 

Its decade-old single currency seems to be on the brink of collapse. 

The US is struggling with a jobless recovery as the presidential election year begins.

Meanwhile, emerging economies like China, its Asian neighbours and most of Latin America - especially Brazil, which is now the sixth biggest economy in the world, leaving previous incumbent Britain in its rear-view mirror - are booming.

To find out more I turned to the Peterson Institute for International Economics on "Think Tank" row in Washington, DC.

It's the only major think-tank in the US devoted to international economics and its leading thinker, Dr C Fred Bergsten, has been running the institute since it was created in 1981.

He says that in 2012, high income and relatively rich nations used to driving the global economy - but whose growth rates are essentially stagnant, like the US, Western Europe and Japan - will rely more heavily on emerging economies in Asia and Latin America to carry the global economic outlook. (See Brazil reference above)

They've shown they can grow with momentum on their own. They've got lots of policy space to expand their economies if they need that. They're increasing trade and investment among each other and that's a fundamental shift in the structure of the global economy."

Europe, he says, will narrowly avoid a real recession and may end up stronger than before - but it'll be close, especially if it doesn't get to grips with its financial crises more quickly.

The 10-year-old Euro - the single currency for more than three hundred million people - will survive because the Europeans can't afford to let it fail.

"I think the Germans will pay whatever's necessary and I think their domestic politics support that ... I think the European Central Bank will lend whatever is necessary.  I also suspect they will bring in the International Monetary Fund to supplant and supplement their resources."

Dr Bergsten says whoever wins the 2012 US presidential election could face significant economic challenges in the years ahead, especially if Europe starts to sort out its economic issues and US politicians continue to trade blame over the country's debt and deficit problems.

It looks like we will continue to enjoy that respite from market pressure at least through the course of next year and that simply means we will delay more, we will hesitate to take serious action and at some point - no one can know when - at some point it will catch up with us."

It's a grim message for whoever find themselves propelled towards the Oval office late in 2012. Things may be about to get even worse with yet more serious ramifications for the people of this country and the world.

UK To Close Borders, Evacuate Expats If Euro Collapses

Submitted by "Sayf Maslul" 

Courtesy Of "Russia Today & Yahoo Video"



As Eurozone nations sink ever deeper into crisis, the UK Treasury is working on a contingency plan for the single currency's collapse. It includes capital control measures that, under EU rules, require agreement from most of the Union members. Britain is also prepared to close its borders and evacuate expats and holidaymakers from the effected countries. Robert Oulds, president of the Bruge Groups of campaigners against excess unification in Europe says many countries will benefit if euro collapses.

The Bonds That Tie—Or Untie

European Leaders Need To Think and Act More Boldly To Stem The Euro Crisis

Aug 20th 2011
Courtesy Of "The Economist"

THE pattern has grown tiresomely familiar. Bond markets shift sharply against weak euro-zone members. Leaders hold a crisis summit to save the euro with more forceful rescue measures. The initial euphoria lasts a few weeks, a few days or even just a few hours—and the cycle begins once again. Can Europe’s politicians ever break it?

To judge from this week’s summit between Germany’s Angela Merkel and France’s Nicolas Sarkozy, the answer is no. The two came together in the holiday season partly because the markets had moved on from an assault on Italy to attack France, a core AAA-rated euro member. Investors were hoping for a deal to expand the euro zone’s bail-out fund, the European Financial Stability Facility (EFSF), or to start issuing mutually guaranteed Eurobonds. Instead the two leaders did little beyond repeating previous accords, promising stronger euro-zone economic governance and putting up such distractions as a financial-transactions tax, harmonised corporate taxes and constitutional commitments to balance budgets—along with more euro-zone summits in future (see article).

The markets were unimpressed. A day later the European Central Bank was again buying Spanish and Italian government bonds, having spent €22 billion ($32 billion) the previous week. The latest shockingly low growth figures for the euro zone in the second quarter may partly reflect fiscal austerity, but they also suggest that it will be harder than ever for troubled economies to grow out of their debt burdens.

It is understandable that Mrs Merkel, in particular, should be loth to embrace bold new rescue plans. She is cautious by nature, more a follower than a leader. She recognises the deep hostility of her voters to big fiscal transfers to weaker, more profligate euro-zone countries. She is already finding it hard to persuade her coalition partners to support in parliament the deal she struck in July to expand the EFSF’s powers and let it buy up government debt. She is mindful that the Bundesbank is vociferously against a big ECB programme to buy government bonds (the ECB has already spent €100 billion). And she fears that her country’s constitutional court may rule all euro zone bail-outs to be illegal.

Yet Mrs Merkel needs to be mindful of something else as well: that the current rescue plan for the euro is just not working. The markets continue to price in default by Portugal as well as Greece (though the third bailed-out country, Ireland, is looking a bit healthier). The attempt to limit the trouble to these three and stop contagion spreading to Spain has manifestly failed: instead Italy and now France, both of which seem to be solvent, have been infected. A year ago it was said that the euro zone could take care of two or three small countries but that Spain was too big to fail. Today, with Italy and even France looming into the picture, the very survival of the euro is coming into question.

A break-up of the euro may not be unthinkable, but it would certainly be damaging, painful and very expensive. This is most obvious for debtor countries whose banks and governments would go bust; but Germany and other creditors would also pay an extremely high price. And the consequences would be scarily unpredictable: Europe’s single market, and even the European Union itself, might be at risk.

Explore our interactive guide to Europe's troubled economies

Mrs Merkel must know that it is worth paying a lot to avoid all this. That means, at minimum, a large expansion of the EFSF, to at least €1 trillion, though there is a limit to how much bigger it can get without denting some creditor countries’ ratings. It is likely to require further large-scale bond-buying by the ECB. It involves accepting bigger restructuring of Greek and maybe other debt. In the end, it may even necessitate mutually guaranteed Eurobonds (see article).

Honesty Is The Best Policy

Any or all of these measures have three things in common: they involve stronger countries giving more support to weaker countries; to offset this, they require intrusive outside control of national fiscal policies. They thus constitute a step towards political union. That is what airy labels like “economic government” or “deeper integration” actually mean.

The problem is that most governments have no mandate from voters to move in this direction. Politicians therefore need to start explaining to their electorates the choices they face, and the consequences of those choices. If Europe’s leaders sign up for a level of integration deeper than voters want, the backlash could split the EU apart—exactly the outcome they are trying to avoid.

Bankers + Politicians = 'Unholy Alliance' vs People

Renowned Eurosceptic and British Euro MP Nigel Farage says saving the banks is why politicians are so determined to bail out Greece and keep it in the Eurozone.

The Euro Has Ripped Europe Apart

Violence on the streets of Athens as protesters vent their fury at the EU and IMF-imposed austerity measures


Analysis

By Sean O'Grady, Economics Editor
Saturday, 18 June 2011
Courtesy Of "The Independent"

The scale of Greece's problem is simply stated: her national debt will approach 160 per cent of GDP on current trends. Here in the UK we are supposed to be in crisis because that ratio is heading for about 75 per cent.

Unless the Greek economy grows at an astonishing rate, the interest on that debt simply cannot be paid out of any conceivable tax take, while the spending cuts and austerity packages are conspiring to push the economy into depression (though official figures, viewed with some suspicion, suggest the Greek economy is managing to grow, despite everything).

In terms of timing, the end could come very rapidly. The IMF's acting managing director, John Lipsky, has threatened the eurozone (in reality that means Germany) with no further instalment of the soft existing agreed loan to Greece unless Germany guarantees it and the Greeks start to behave.

For a caretaker leader, Mr Lipsky is taking a surprisingly tough and decisive line in this crisis. Even with that threat gone there is no guarantee that the fresh loan now being discussed – a further €100bn on top of the €110bn settled last May – will actually happen. Beyond that, in 2013, the eurozone is supposed to bring in new rules about what happens when a country goes bust, requiring private bondholders to suffer losses they are not now. Again, though, the EU's leaders are yet to settle the principles, let alone the detail of this.

Beneath all this is a simple, brutal truth. Greece, like the other peripheral distressed economies, is an uncompetitive economy. She got into this mess because she joined the euro and was suddenly able to borrow at low "German" rates of interest. She consumed more than she produced and ran up enormous government debts.

This is only an outward and visible symptom of a deeper problem, however. Greece doesn't produce or export enough, and it is too feeble to remain in the same currency area as Germany. If Greece were as productive and fast-growing as China, say, there would be no euro crisis. Deep structural reforms to promote growth and higher productivity are the way to solve the Greek crisis for good, but then even they would take decades, as they did in the UK after the 1980s reforms. In Greece they are talked about, but these measures are seldom implemented.

Ireland and Spain are less competitively challenged, and more victims of their property and banking excesses; Portugal's issues are closer to Greece's; Belgium just seems unable to run its public finances or even form a government (a year after the general election). Italy and France have a less urgent need but no less serious competitive challenges in demographics and structurally high unemployment, especially among the young.

In all these cases it is hard to see how the euro is the answer to their problems. Far from bringing Europe's economies closer together, the euro seem to have magnified the differences.

Even now the European Central Bank is raising interest rates to restrain rising German inflation, though it is the last thing the poleaxed Spanish real estate market and banks need. When will the madness end?

What Happens Now?

1. Give the Greeks another loan

Who wants this?

The Greeks, obviously, and pragmatically minded well-wishers overseas.

What would happen?

This is usually referred to as "kicking the can down the road". Greece's fundamental problems would remain unresolved. The IMF would become increasingly restive, and make more and more demands for the EU to guarantee loans made to Greece. Time, and therefore hope, is bought; but the crisis never ends.

Winners and Losers

The German, Finnish and Dutch taxpayers lose, mainly. They are angered at having to lend money to pay private bondholders who can see a 25 per cent yield on Greek bonds. Investors, politicians and most others would sigh with relief that the evil day has been postponed. Again.

Likeliness Rating

8/10

2. 'Forgive' the debt and let them off

Who wants this?

Rioters in Athens, the head of the eurozone finance ministers, Jean-Claude Juncker, and the Irish and Portuguese.

What would happen?

One way or another Greece's debts are dissolved by having her neighbours take them on. Formally, the eurozone could replace its current debts issued by national treasuries with "Eurobonds" that are backed by all nations jointly. It would imply a European Treasury, control over national budgets and tax rates: a Europhiliac dream.

Winners and Losers

The peripherals – Portugal, Greece, Ireland – would see the cost of servicing their national debt slashed; but better risks such as Germany would lose their advantage. German households would pay more for their bank loans and mortgages.

Likeliness Rating

3/10

3. Allow a chaotic Greek default

Who wants this?

A few anarchists in Greece (which doesn't mean it couldn't happen).

What would happen?

If the IMF or, less likely, the eurozone decided to freeze the loans already agreed with Greece, it would be forced to say "can't pay won't pay" the next time any of its bonds fall due, usually a matter of a few weeks. In that case the value of Greek government bonds held by banks across Europe and the European Central Bank would shrink to nil, pushing the world into a Lehman-style crisis and "second credit crunch". Europe would probably sink into depression.

Winners and Losers

Everyone loses from this, and everyone knows it is the Greek government's ultimate bargaining chip, to plunge us all into a slump. Given that the eurozone takes half of the UK's exports, and our banks are intimately linked to those in Europe, Britain would hardly be immune.

Likeliness Rating

5/10

4. Arrange a more orderly new deal

Who wants this?

Germany, as it means private bondholders "share the pain". The ECB has suggested a voluntary postponement of bond payments.

What would happen?

If things go well, it would not be a proper default, or "credit event", at which point the "insurance" bondholders took out on the Greeks' defaulting would not have to be paid out. Such "credit default swaps" could be very costly for those banks or insurers who have written them. Even a mild "reprofiling" of debt would cost the already weakened banks dear.

Winners and Losers

A sort of "AV" solution that will probably emerge as a consensus. Everyone wins, if only in the sense that it might prove the least worst option. If mishandled, it might prove almost as destructive as a panic default.

Likeliness Rating

8/10

5. Greece exits the Euro

Who wants this?

No one much, though again it may prove inevitable. The French are probably the most resistant, on the political, almost emotional grounds of the "project".

What would happen?

Greece's unmanageably large debts would still be in euros even when she goes back to the drachma. Given the drachma is likely to be a very weak currency it will takes lots to buy a euro, so Greece's debts would actually get bigger. Her economy would collapse, just as Argentina's did when she broke her dollar link in 2001. Long term, though, it would allow Greece to rebalance her economy less painfully. Sets a humiliating precedent for the eurozone.

Winners and Losers

Greece would win in the longer term, but costs, political and economic, for all in the meantime.

Likeliness Rating

4/10