POREG VIEW: It will be fair and proper to say not the entire world economy but of some western countries which have dominated or dominating the investment and strategic world is in bad shape. Two -and-a-half years is a fairly long enough period for these economies to recover from the September 2008 meltdown, more so since America has declared the official end of its recession. Reality check shows the recovery process is faltering, growth rates are slowing, and sovereign credit rating is causing concern.
Even the white knight in shining armour, the US, is witnessing rise in the ranks of jobless. It needs a sustained growth rate of at least 3 percent to make a dent in the near-double-digit official unemployment rate. That is no where in sight with the Democrats and the Republicans locked in a slugfest on the Capitol Hill and President Obama content with issuing warnings on job drain to India and China. Viewed against the backdrop of the bad shape of the manufacturing sector, and continued dip in the home loan segment it is clear that the fundamental problems that had pushed the world economy into the deepest slump since the thirties are still at work. And the multi-trillion-dollar bank bail-outs have had limited impact beyond cleansing the balance sheets.
The World Bank in its latest Global Economic Prospects report (issued June 7) does not offer a cheer. It has forecast a slower economic growth for every region except sub-Saharan Africa for this year and the next. It expects the world economy to expand by a mere 3.2 percent this year, lower than the modest 3.8 percent rate for 2010. The Bank projects a dismal 2.6 per cent growth for the US economy for this year. It expects that the American growth rate will remain below 3 percent at least through 2013. This is undoubtedly bad news for the US.
The World Bank has no optimistic forecast for the three emerging super economies. It says China, India, Brazil and other developing countries will witness a 6.3 percent fall for the next two years, a full percentage point below the 2010 growth rate. These are the countries that have largely accounted for global growth since the Housing mortgages triggered the meltdown in the US and some European nations.
The World Bank projections are in sync with ‘expert’ views from American establishment. Lawrence Summers, who had headed President Obama’s National Economic Council, has warned that the United States “is now halfway to a lost economic decade.” He noted that between 2006 and 2011, US economic growth averaged less than 1 percent a year, similar to that of Japan “in the period its bubble burst.”
Professor Nouriel Roubini of New York University has a word of caution. He foresees a “perfect storm” of fiscal deficits in the US, a slowdown in China, European debt defaults and stagnation in Japan. China could face a “hard landing” after 2013 as a result of overcapacity in fixed investments and bank failures.
As socialist commentator Barry Grey says, the sharp increase in state indebtedness resulting from the bailouts has only further undermined the longer-term solvency of the banks, since they were left holding tens of billions of dollars in government securities whose value has plummeted.
Greece is a case in point. One year after receiving a €110 billion loan tied to savage austerity measures, the land of Alexander, Aristotle and Plato has plunged into a deep recession, which has undermined state revenues and intensified the debt crisis. Now, in exchange for a new loan, the social democratic government is imposing even deeper cuts as well as a fire-sale of state assets. Ireland, Portugal, Spain and other heavily indebted countries are heading for a new financial crisis.
The banking sector refuses to learn; it is also yet to be taken to task for the dubious assets it has acquired on the basis of toxic sub-prime mortgages. The derivatives market, which played a central role in the financial meltdown, remains unregulated. The giant banks appear to be back into reckless speculation, and credit swaps.
Standard and Poor’s has downgraded Greek sovereign debt and Greek banks to junk status. Another rating agency, Moody’s, has announced it was reviewing the credit ratings of three of France’s biggest banks. This follows data from the Bank for International Settlements which said French banks have more to lose from a collapse of Greek banks and a sovereign default than the banks of other countries, such as Germany, the United States and Britain. On June 16, Greek stocks fell by nearly 3 percent, and interest rates on Spanish government bonds rose, reflecting market fears of a knock-on effect from the Greek crisis
The European Union is engaged in intensive discussions to evolve a joint approach to the growing economic crisis in Greece. Germany, a key player, is seeking some involvement in debt relief by private-sector investors, and France. The US administration and a number of other EU countries, France opposes any such solution.
Germany wants all the 27 members of the European Union to contribute to a new bailout fund for Greece. This will be second loan to Greece and not many European countries, notably Britain, are ready to oblige. Primarily all this is because of the fear that compromise solutions will only provide a temporary breathing space to Greece and postpone a sovereign default
One strong voice against debt swap is Mario Draghi. A former governor of the Bank of Italy, who is tipped to head the European Central Bank, he has cautioned the European Parliament of a chain of contagion from restructuring of Greek debt. "Who are the owners of credit default swaps? Who has insured others against a default of the country? We could have a chain of contagion".
The fear is not misplaced. The Jasmine revolution and its aftermath in the Arab world have an economic core notwithstanding their political orientation. Any deterioration in the economy will fuel new and broader social struggles, providing ample opportunities for the revolutions of all hues.
Yes. There is no magic wand to wish away the brewing crisis. Short term palliatives like credit controls will remain palliatives unless the larger issues are addressed. Inclusive growth is not a mantra for countries like India alone, whose economies are complex and multi-layered. It applies to the economies of the biggies which must work towards a rational reorganisation of their domestic economies as also global economy. In today’s globalised world, the days of cocoon raj are over.
–Malladi Rama Rao
