It’s official. The National Bureau of Economic Research now says the US entered a recession a year ago, in December 2007. Thus, we already know that this is no average 10.7-month US downturn. If anything, this recession now seems to be accelerating, a full year after it began. In fact, it is shaping up to be the worst of its kind in at least 25 years. And not just for the US. Virtually every other big economy around the world is reeling, suffering from the same credit shock.
So this recession is a global one, with negative growth ahead for developed economies and a significant slowdown for emerging markets. How both large and small countries respond, singly and in concert, will tell us a lot about state of globalization today and the lessons learned, or not, from history.
The slowdown has not gone unnoticed. Governments everywhere have mobilized to combat it. They have bailed out their distressed financial industries and may support other crippled sectors, US car makers among the more prominent candidates right now. And massive fiscal stimulation packages are also in the works to revive investment, trade and employment globally.
Did we say everywhere? There is one developed country that is apparently unwilling to join the activists, and that is Germany.
To date, Chancellor Angela Merkel’s government has granted a mere 12 billion euros for recovery purposes, less than half the sums the UK and France have committed to fight their recessions. Germany’s reluctance is not due to lack of means: its debt and deficit situation is far sounder than in any other large developed country. Rather, Germany’s reluctance to spend its way out of recession has its origins in the policy of fiscal frugality that has been at the core of its export renaissance over the past decade.
But today’s recession challenges this kind of economic Darwinism. We are convinced that what got Germany back on track as an exporter won’t bring them further today. By relying on exports and not boosting its domestic demand, we think Germany is jeopardizing its own growth. Beyond that, they are also tacitly engaging in a beggar-thy–neighbor policy, whereby they look to prosper from the fiscal impulses provided by their trading partners at little cost to themselves. This is not unlikely to be warmly received by those same partners.
There is also one emerging market not entirely without reproach in matters of economic solidarity, and that is China. Yes, the recent 600 billion dollar stimulus package dwarves those of other nations. The US would have to spend roughly 2.4 trillion dollars to match it on a relative gross-domestic-product basis. And yes, domestic demand, both private consumption and public investments, are targeted in China’s package. But this should not obscure one missing element in China’s response to the global slowdown, its currency policy.
Roughly coinciding with the announcement of their fiscal stimulus program, the Chinese authorities seem to be reversing the appreciation trend of their currency against the dollar. Since 2005, the Chinese yuan has appreciated by 20% against the US dollar, which is still too low judging by the burgeoning China-US trade gap.
The undervalued Chinese yuan and China’s widening trade gap with the US are root causes of the current crisis. As their massive US dollar reserves grew, the Chinese were essentially buying US debt. This pushed US interest rates to very low levels, and this cheap credit swelled debt levels of both households and financial institutions in the US. And we now see the consequences of that bubble.
As with Germany, what fed China’s export success won’t bring them much further. US households have finally started to save. They are unlikely to buy up Chinese goods even if they are cheaper. In November, Chinese exports to the US shrank by 6.4% compared with a year ago. And even if US consumers were to revive their old spending patterns, in the end China might also appear to playing beggar-thy-neighbor. This could have truly dreadful consequences, since protectionism sentiment is no longer taboo in America. That is one road we really don’t want to take again (see Depression, Great).
We note with concern that Germany and China’s self-centered policies to date, though different in origin and implementation, are equally dangerous today. The recession is global. The solutions to mitigate it should also be global.
