Jens Bastian and Vanessa Rossi
A new year always presents many risks and uncertainties - this is not unusual. However, the challenges that the global economy faces in 2011 include not only the normal threats posed by volatile background conditions, but also the possibility of a major structural break-up that might have far-reaching, possibly devastating, repercussions.
The 'normal' risks that the global economy faces include the challenge posed by global food prices and concerns over the US economy, the dollar and speculative capital. Rising food price inflation is damaging emerging markets' growth prospects: if this escalates, it could pull the rug from under the key driver of global growth. Yet tightening policy to curb increases in food price only works by weakening demand - not only posing a risk to global growth but also failing to address underlying food supply problems.
Improving growth in
Greater certainty about positive global growth prospects would also be the best cure for the waves of speculative capital roving the world - these must be anchored into real investments, enhancing real growth prospects and turning volatile capital into a stabilising ballast for the world economy.
In spite of these uncertainties, forecasts for global economic growth generally remain very robust indeed, in the 4-4.5 percent range for 2011, only slightly down from the rebound to almost five percent last year. The outlook for global economy is also relatively insensitive to the 'normal' variations in growth forecasts for Europe. Notably, whether the
However, in our view, Europe does pose a severe threat, not because of the importance of its GDP growth for the rest of the world under 'normal' conditions and risks but because of the potential for an eruption in the economic and financial system similar to, or perhaps worse than that of
Critical Year
Concerns about the integrity of the Eurozone and its financial sector have never been as widespread or as well founded as they are today. On whatever basis this is examined, the Eurozone debt crisis is still in intensive care. So 2011 will almost certainly be a watershed year for Europe and the euro.
As
After only a few months of relative calm, rumblings began again over the extent to which the Eurozone would continue to provide assistance and guarantees to member states in financial difficulty beyond the mechanism's current three-year time span. This coincided with news that the Greek economy was falling further into recession (GDP falling 4.2 percent in 2010), implying it may be unable to comply with the fiscal targets agreed agreed with the IMF and the
The Irish problem is therefore quite different to that of Greece and it raises deeper questions. Greece presided over runaway public finances for many years, illustrating the failure of fiscal discipline and enforcement capacity in the Eurozone in spite of the rules and regulations stipulated in the Growth and Stability Pact. Ireland more than met Maastricht rules but has been dramatically sunk by its aspirations to host European-scale banks while the ultimate responsibility remained at the national level. With its banks now struggling to survive or being fully nationalized, this is a responsibility Ireland should-but clearly cannot-bear on its own, given banking-sector liabilities over ten times its GDP.
The key concern going into 2011 rests on the following observation: two countries as economically and fiscally different as Greece and Ireland nevertheless ended up rowing in the same bailout boat. And others could follow. The essential question that follows is how much Eurozone member states are prepared to help?
When the Irish banks were forced to seek assistance for the second time in a year, Ireland had to look for help from the Eurozone and the IMF. The Irish government had already bailed out the banks once in 2010, to the tune of
However, European banks are also heavily involved, and the risk from contagion is much greater than for Greece. These banks hold more than
Widespread Burden
The political and financial-sector tremors in
These excessive debt levels limit the scope for providing assistance to the troubled Eurozone periphery, creating doubts about the sustainability of bailouts.
The 16-member euro zone must confront the risks posed by escalating sovereign debt and the politics of implementing austerity budgets. This spells trouble: austerity will not be popular even over a short time span, yet to bring the Eurozone's debt back in line with the sixty percent rule will require many years of fiscal stringency. Political capital will be consumed by this long grind and, with little scope for new initiatives, economic energy will also be sapped.
However, if countries ignore the sixty percent limit and continue with high debt levels, this may lead to a permanent European sovereign debt crisis and prolonged recession, which would also enfeeble the economy over the long run. Faced with unpleasant choices, and with no easy solutions, member states may fail to agree on a coordinated strategy, never mind on measures to enforce it. In this respect, 2010 did not represent a bumper year for successful crisis management capacity among Eurozonemember states.
United in Euro
This is truly a fight for survival for the Eurozone, and by extension the EU - and note the repeated mantra of German Chancellor
Given the scale of the debt built up in the major economies, and voter concerns in the more viable economies over the impossibility of taking on any burden but their own, there may be little option but to move to a debt divorce - effectively returning to the original Maastricht rule of 'no bailouts'. Continuing confidence, bad debt and liquidity problems in the banking sector may also force countries to make tough decisions over whether and under what conditions to back their banks. The restructuring of banks and sovereign debt in the weakest member states would be painful and could call into question their commitment to the euro. Some exits cannot be ruled out and might be facilitated by polarisation in holdings of debt if investors have already fled. We should also not forget that, back in spring of 2010, a political taboo was broken at the height of the Greek crisis when Chancellor Merkel and her Finance Minister
At the beginning of 2010, it was unthinkable that the euro, the world's second reserve currency, could fail. Monetary chaos would cause short-term disruption in the global economy and might prove difficult to control. A year later, the euro is in intensive care and two of its members are on life support with the IMF and the ECB. But we must seriously consider the possibility of change in terms of membership, enforcement and sanctions as well as conditionality. Impacts on the rest of the world depend on how the Eurozone handles this crisis and the changes to come - and Europe must hope that growth in the rest of the world continues to provide the stimulus necessary to help it through this crisis.
(
Available at Amazon.com:
Aftermath: Following the Bloodshed of America's Wars in the Muslim World
Displacement and Dispossession in the Modern Middle East (The Contemporary Middle East)
The End of History and the Last Man
The Clash of Civilizations and the Remaking of World Order
The Tragedy of Great Power Politics
The End of the Free Market: Who Wins the War Between States and Corporations?
Running Out of Water: The Looming Crisis and Solutions to Conserve Our Most Precious Resource
Bottled and Sold: The Story Behind Our Obsession with Bottled Water
Water: The Epic Struggle for Wealth, Power, and Civilization
At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes
Friendly Fire: Losing Friends and Making Enemies in the Anti-American Century
Dining With al-Qaeda: Three Decades Exploring the Many Worlds of the Middle East
Uprising: Will Emerging Markets Shape or Shake the World Economy
- Top Global Risks of 2011
- China and United States Need Overarching Concept for Interaction
- China's Growing Military Might Poses Many Policy Questions
- Britain and China: Then and Now
- How Repressive Regimes Use the Internet to Keep Power
- Islam's Hijackers and Hijackees
- WikiLeaks: Diplomacy as Usual
- Africom: Soft Power Warriors
- Nigerian Elections: Levelling the Playing Fields
- Nigerian Elections: Changing of the Old Guard?
- Sudan: Beyond Southern Sudan
- Afghanistan: Deadly Addiction
- The Euro: Until Death Do Us Part
- Russia: Rewriting History
- Gulf States Should Take a DIY Approach With Iran
- Back to 'Normal' in the Middle East
- America: Uneasy Engagement
- America: Flying Into Turbulence
- Obama and Human Rights: Continuity and Change
- Western Economy on Suicide Watch?
- South America Enters Middle East Quagmire
- The Political Power of Social Media
- West Is Best? Why Civilizations Rise and Fall
- Exploring the Influence of Culture on Military Doctrine
- The Good News About Gas
- Less Than Zero: Bursting the New Disarmament Bubble
- Why Moscow Says No
- A Third Way to Palestine - Fayyadism and Its Discontents
- The Dangers of a Nuclear Iran
- Plan B in Afghanistan
- The Fallout of the Global Gun Trade
- Finish the Job: How the War in Afghanistan Can Be Won
- Why the Rich Are Getting Richer
- A Leaner and Meaner Defense
- Defense Is On The Table
- The American 21st Century
- Culture Matters: Real Obstacles to Latin American Development
- A Wave of Christianophobia
- Lessons From the Iraq War for Afghanistan
- Foreign Policy Review Suggests a Losing Effort
- Iran: Glow, Little Glow Worm, Glow
- Believe in Violence and Be Saved
- Colonialism Still at Heart of Africa's Growing Pains
- The Empty Chair
- North Korea: The World's Problem Child
- Save the North Koreans!
- For Middle East Peace, Israel Must Prepare for Nuclear War
- Iran Nuclear Talks: A Widening Chasm
- A Sordid Dance in Afghanistan
- Holding the Course in Afghanistan
- As New START Debate Rages, Quiet Nuclear Progress With Russia
- Argentina Needs to Face Education Debacle
- A World Full of Fault Lines
- Facebook, Twitter and the Search for Peace in the Middle East
- China's Leadership: Fractures Finally Showing
- China: Uncertain Leap Forward
- Britain and China: Being Friendly
- Belarus: Land Between
- Sudan's Referendum: Prickly Interdependence
- Saudi Arabian Foreign Policy: Limits of Being Helpful
- Iraq Refugees: Seeking Safety
- Troublesome Partner in Afghanistan
- NATO Presses on With Futile Effort in Afghanistan
- Counterfeit Medicines: Health and Harm
- Food Supply: Lunchtime Blues
- Cybersecurity and Society: bigsociety.com
- America's Credibility Deficit
- Global Warming Conference Faces Meltdown
- WikiLeaks Disclosures Not Earth Shattering
- WikiLeaks May End Up Helping America
- WikiLeaks and The Invisible Government
- Wikileaks: More Than Just an Embarrassment
- Wikileaks: Undiplomatic Diplomacy
- A WikiLeaks Wake-up Call
- Will WikiLeaks Hobble U.S. Diplomacy?
- How WikiLeaks Can Make Us Less Free
- Wikileaks: Small Revelations That May Cause a Big Idea to Take Hold
- G20 Summit: Hitting Singles in Seoul
- The Consequences of Fiscal Irresponsibility
- GDP Now Matters More Than Force: Policy for the Age of Economic Power
- What Population Growth and Decline Means for the Global Economy
- Leading Through Civilian Power: Redefining Diplomacy and Development
- The Future of American Power: Dominance and Decline in Perspective
- Who Do You Call If You Want to Divide Europe?
- The Game Changer: Coping With China's Foreign Policy Revolution
- Why the Retirement Age Is Increasing
- Religion's Growing Influence in International Politics
- The Difficulty of Integrating Rising Powers
- Ban-ki Moon Has United Nations 'Drifting Into Irrelevance'
- Bachelet Faces Uphill Battle at U.N. Women
- Murderous Tactics Fueling Terrorist Propaganda
- Benjamin Netanyahu: A Hawk in the Ointment
- Diminished Capacity
- Moscow's Modernization Dilemma: Is Russia Charting a New Foreign Policy?
- NATO Summit Unlikely to Answer the Most Important Questions
- Franco-German Call for Change in the EU Meets with Much Opposition
- A Tenuous Deal in Iraq
- Conflict or Cooperation? Three Visions Revisited
- A New Global Player: Brazil's Far-Flung Agenda
- Pax Ottomana? The Mixed Success of Turkey's New Foreign Policy
- Rise of the Mezzanine Rulers
- Globalizing the Energy Revolution
- Democracy in Cyberspace
- The Digital Disruption
- Africa: Agriculture's Final Frontier
- A Reading List for the Twenty-first Century
- Latin American Leaders Could Have Learned From South Korea
- Region Ignoring Venezuela Coup Threats
- To Fight Corruption, Start Cutting Red Tape
- New Congress Won't Lead to 'Fortress America'
- The Shifting Balance of Power
- Checking China's Territorial Moves
- Why China Has a Point About Quantitative Easing
- China's Rate Hike: Winners and Losers
- Taiwan's Shadow
- Fools Rush in Where Europe Rushes Out
- Germany to Muhammad: Go Home
- Can NATO Nudge Russia Westward?
- French Demonstrations Tell a Familiar Tale
- Chavez a Pain for Spain
- Nestor Kirchner's Death May Mark End of an Era
- Petraeus Follows Iraq Formula in Afghanistan
- Heavy Handed Intervention Has Stalled Arab-Israeli Peace Process
- George Clooney Urges Obama and Media To Focus On Sudan
- Fighting Hunger in Des Moines
- Rise in Tourism to Miami May Signal Danger Ahead
- Peru May Be Next Latin American Success Story
- Nobel Winner Right About Risks of e-Books
- Nestor Kirchner's Death May Mark End of an Era
- Chavez a Pain for Spain
- Economic Woes Put Brittle Nations on Edge
Copyright 2011 Chatham House; Distributed by TRIBUNE MEDIA SERVICES, INC.