Global Weakness: Are We Out of Policy Tools?

June 27, 2012

Economic growth is slowing almost everywhere as financial stress is again intensifying rapidly, affecting financial markets worldwide.  Underlying this dangerous trend are three separate movements occurring around the world.  Each one individually would cause strife in the global marketplace, but together they threaten to undermine the fragile economic recovery and trigger a double-dip recession, says John Makin, a resident scholar at the American Enterprise Institute.

The first problem area is the still-growing debt crisis in the Eurozone.

  • The crisis began in Greece: though an austerity-laced rescue package was accepted in March 2012, the coalition that agreed to it was subsequently voted out of power.
  • Tension has since spread to Spain (a much larger economy), where the government is already in fiscally-troubled waters after recapitalizing one of the country's largest banks.
  • Fear now exists that the crisis will soon spread to Italy, and that conflict within these larger economies will signal the disorderly destruction of the euro on the whole.

The second area of concern is the American economy, again, where the so-called "fiscal cliff" threatens to derail an anemic recovery.

  • Despite the maxing out of monetary policy in the United States (interest rates have been driven as low as they can be), unemployment still managed to worsen last month.
  • This will almost certainly be worsened by the implementation of the sharply contractionary fiscal cliff at the end of 2012: under current law, tax increases and spending cuts equal to nearly 4 percent of gross domestic product will be implemented at the end of 2012.
  • Barring impressively cohesive political action by a sharply divided federal government, the fiscal cliff will be implemented.

Finally, though it has received considerably less coverage in the media, the slowing down of developing economies offers its own dangers.

  • With the release of new Chinese data, estimates of growth for 2012 have been reduced from 9 percent to 7 percent.
  • This is the result of weaker exports to Europe and elsewhere, along with some slippage of growth in domestic demand.
  • This is coupled with similar slowdowns in India and Brazil.

Source: John Makin, "Global Weakness: Are We Out of Policy Tools?" American Enterprise Institute, June 12, 2012.

For text:

http://www.aei.org/outlook/economics/international-economy/global-weakness-are-we-out-of-policy-tools/

 

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