As the vortex that is the Eurozone refuses to close up – no matter how much money German taxpayers throw into it – the rest of the world has shifted from complacency to concern to high alert.
Starting with those on the fringes of Europe’s single currency zone like Britain, Russia and North Africa countries, and extending right across the planet to the BRICS and the United States, policymakers are chewing hard on the implications.
“When people are willing to pay the German government for the privilege of holding its two-year paper, and are willing to lend to America’s government funds for a decade for a nominal yield of less than 1.5%, they either expect years of stagnation and deflation or are terrified of imminent disaster,” wrote the Economist in an only slightly hyperbolic lead editorial in its current edition. “Whichever it is, something is very wrong with the world economy.”
All this has the fences going up around the world. Central bankers are girding for volatile currency conditions – and the need to use monetary policy to fend off the rush out of the euro that already is underway. At investment banks and the big global funds, projections for economic growth in 2012 are being revised downward or sometimes erased altogether, and the “flight to safety” – i.e., low interest but sturdy vehicles like US T-bills, Swiss francs and gold threatens to become a stampede.
Politicians, meanwhile, confine themselves primarily to finger pointing, or in a few cases, scapegoating. Thus will they raise the risk of repeating yet another of the disastrous mistakes of the Great Depression – protectionism that seizes up one of the few areas of the global economy, trade, that hasn’t succumbed to short-term thinking.
For instance, presumably on the theory that no crisis should be wasted, Britain’s chief economic official, Chancellor of the Exchequer George Osborne, has blamed the country’s largely self-inflicted plunge into a double-dip recession on his continental cousins. Even in his own party, few are fooled.
But I don’t want to sink to that level right now (or sink back, to be fair). Instead, here’s what this appears to mean from a global perspective for the world’s most important economies.
We’re going to take as a given that the Eurozone as a whole falls back into recession, with the “periphery – Ireland, Greece, Spain, Portugal – experiencing near depression.” US policy will keep the economy growing ever so slightly – in effect, that stimulus-fueled growth is politically impossible. I’m taking into account pretty serious softening of growth among all the BRICS, but especially in India and China, which together are far more significant globally than the other three (Brazil, Russia, South Africa).
Also take for granted a Greek exit from the single currency in the next six months, known in finance these days as a “Grexit,” but no similar collapse for Spain (“Spexit”). A Spexit is cataclysmic – in effect, an event that will force global investors to pull support for similarly structured economies, including giant Italy. In effect, Spexit = game over for euro = depression in Europe and deep, ugly recession in most other economies. So let’s not go there now – it’s not the most likely scenario, at least in the next six months.
So, tomorrow we break it down. First, what I think happens, starting with the Eurozone’s “near abroad,” which are the economies most dependent on EZ growth. These include large, key economies like Russia, Turkey and Britain.
Then we’ll look at the BRICS, none of which escapes unscathed and a few of whom (oil-dependent Russia, export dependent China) will feel Europe’s debacle very strongly.
Finally, the United States: I’ve already written on how the policy lessons of the Eurozone are being ignored by Washington (well, not by everyone, but collectively, the inability to lift a finger will bring the same result). So how will this play out? What are the “means of transmission” for contagion to the US? They do exist, but they are more subtle (and potentially more devastating) than other countries.