As Northern Hemisphere politicians take their long Summer holidays, the global economy time bomb is still ticking towards probable detonation in September or October.
With the decent into a major recession having taken years, it is dangerously easy to assume that it will continue a slow decline for years more, or be replaced by an economic upturn. Clearly, many politicians hoped this would be the case. Sadly, reality is very different.
Before the long summer holidays began, new and deeply worrying stages in the global economic saga had begun.
Greece is perilously close to requiring another major bailout and yet there are no indications that the new Greek Government is taking the steps necessary to begin the process of bringing their economy back under control. The Greek position is that they can’t carryout the necessary deficit reductions but they don’t want to leave the EuroZone. They can’t deliver on the cuts they have already agreed to because the political and social situation is so unstable that civil war could break out at any time. Civil instability means that the vital tourist industry has difficulty in persuading tourists to visit Greece, even though the reducing value of the Euro is making Greek holidays very cheap for tourists from outside the EuroZone. Civil instability will continue as long as the queues at soup kitchens grow and Greeks either take their money and themselves to another country, or increasingly suffer at home. Against this situation, there is a deep political desire to remain inside the EuroZone and the European Community. Part of this desire is a belief that the good times will return and Greek Government spending can let rip again, even though that belief has no basis in reality. Even stronger is the desire to be European rather than Asian and that goes deep into Greek feelings after the long subjugation by the Turks. Ironically, the Turks have also long aspired to be EU Members, but they position outside the EU has given them an economic boost while the Greeks have suffered great hardship as the EU tries to rebalance to send money to the newer Members at a time when the Euro hovers on the brink of extinction.
The Greek situation will resolve itself one way or the other. At any time during the next six months, Greece may be expelled from the EuroZone and possibly from the European Union. The Greek tragedy has gone on so long that Greek exit from Europe has been factored into political and economic calculations around the world, as has Cypriot exit because Cyprus is so closely connected economically to Greece – with the exception of the Turkish zone of Cyprus.
The major shock developing is in Spain where the bank bailout is increasingly looking like the start of a demand for a series of bailouts that will make the Greek saga look like a minor diversion, which in relative terms it is. If that increasingly probable situation becomes hard fact, the pressures on Italy and France will become very serious in what is now a very close copy of the Great Depression. During the early 1930s, nations began to put self interest first and politicians tried to ignore some hard problems that could not be ignored. A range of assumptions proved to be false and apparent economic strength proved to be a frail facarde. All those who hoped to be saved by strong nations, saw those nations struggle and falter. The result was stagflation, where prices rose, sometimes at unbelievable levels, but economic activity stagnated and interest rates remained low.
During the Summer the politicians may be clilaxing but economic activity continues as people and companies are paid and in turn pay their bills. In many countries, this process is increasingly difficult for small and medium companies and for private individuals but, as public sector and major corporations depend on smaller enterprises and the public, no one is immune to the growing pressures, whether the news media is watching and the politicians are at work or not. National banks are attempting to cope and prepare for major turbulence. Interest rates for savers are likely to fall close to zero, while banks increase the rates they lend money at, creating stagnation in the private sector and preventing it from powering the corpulent public sector and the economy out of danger. Even those countries attempting to bring their deficits under control are finding that they need to borrow more money.
The most serious development has almost slipped out under the radar as populations attempt to holiday and the 2012 Olympics grabs news attention at a time when news generation falls with the propagandists going on holiday. The great hope amongst other economies was that the developing economies in Russia, China, India and South America would somehow save the world by creating new demand, using their recent wealth to prime a global recovery. Unfortunately these economies are being to suffer their own problems as demand for their products dries up. This is beginning to demonstrate the frailties of these new economies. They have all made some spectacular advances in recent years, mainly supplying countries where profligate politicians lavishly spent money they did not have. That period of expansion has been relatively brief and not built the surpluses necessary to prime the global recovery and maintain social stability at home. In most of these economies a few people have suddenly become very rich but the mass of the population has remained very poor. The poverty stricken majority is likely to suffer most from a reduction of growth and the risk increases of civil disturbances. That in turn creates new dangers for the older economies because they desperately needed to increase their exports to the new economies. Britain is one example of exports to EU countries falling and exports to new economies expanding strongly to the point where the EU accounts for less than half of British exports with the balance moving to new and renewed markets with increasing vigour. At the same time, EU exports to Britain have increased. However, if the newer economies slow down, it will be increasingly difficult for British exporters to grow their trade. That in turn will reduce the ability of Britain to accept EU exports and there will be no alternative markets open to those EU exporters, rapidly increasing pressure on their economies at a time when the EuroZone is already on life support.
What has also largely slipped under the news radar is the situation in Germany. Merkel is approaching elections with a worsening situation for Germany and a reduction of support for her Party. Into that already difficult situation has stepped the German Courts. When Merkel announced support for refinancing in the EuroZone with German Euros, the markets were already beginning to cast a skeptical eye on the realities behind the rhetoric. Then the German Courts were required to rule on whether the German Government was constitutionally free to make the commitments which also represent a loss of sovereignty for the German electorate. Initially it was hoped that the Courts would act quickly and confirm the legality. As politicians prepared for their holidays the German Court announced that it was not prepared to consider the situation before mid September and that it considered the arguments would take some time to be adequately heard, implying that German lawyers considered the constitutional issues to be finely balanced and that a decision might not be in Merkel’s, or the EuroZone’s, favour.
If the combination of the German Court delays and the new demands from EuroZone Members for yet more bailouts further unsettle an already very nervous finance market, the Euro Crisis will suddenly reach a terminal point in September and October. In that situation further economic bad news from around the world will create a very serious crisis and present a very uncertain future.