16 December 2010
The tide from the global recession has ebbed, but economists say the world is still feeling turbulence in its wake: continuing high unemployment, the European debt crisis and a lopsided, uneven recovery. Mil Arcega spoke with economists about the big stories that shaped the global economy in 2010.
A snapshot of the world economy in 2010 shows the globe weathering the worst financial crisis of this generation.
But more than two years after the downturn, it remains a fragile, uneven recovery - one that World Bank economist Hans Timmer says is largely driven by growth in developing nations.
"By far the most, the biggest story is the very strong performance of the emerging economies especially in Asia, but increasingly also in Latin America," said Timmer.
But the rapid expansion in countries such as China, India and Brazil underscored a growing imbalance.
By the mid-point of the year, stubbornly high unemployment in the United States, and the threat of insolvency within the 16-nation eurozone had become another reminder that the recovery would neither be smooth nor easy.
Uri Dadush is the director of Carnegie's International Economics Program.
"I think the biggest story in 2010 was the continuation of the recovery which was actually quite rapid, but the other big story of 2010 was the emergence of the European debt crisis which is continuing to simmer and represents the biggest risk for the global economy in 2011, " said Dadush.
Amid a storm of protests in Greece over austerity measures that were preconditions for a European bailout, worried investors lost confidence in the euro. The dollar wasn't doing much better. A week before a crucial meeting of G20 leaders, the U.S. Federal Reserve announced a new plan to buy $600 billion in government securities. The policy was meant to lower interest rates and bolster the U.S. economy.
But G20 leaders accused the U.S. pumping dollars into world markets to make U.S. exports cheaper.
The policy fanned protectionist sentiments and, says Domenico Lombardi at the Brookings Institution, undermined the U.S. argument against currency manipulation by China.
"The timing of that announcement was a little bit unfortunate because it sort of jeopardized in a way the chances of having a full cooperative meeting because then emerging economies reacted to that announcement," said Lombardi.
Without the urgency that had characterized previous meetings, G20 leaders managed only a commitment in principle against currency manipulation.
But the G20's inability to find more common ground was soon eclipsed by fears of a larger European crisis. Faced with a banking crisis and the prospect of not being able to repay its debts, Ireland became the second eurozone country to ask for a bailout.
Without a bigger fund, economist Desmond Lachman at the American Enterprise Institute says other high-debt countries will fall.
"The country that is very likely to be next is Portugal, and after Portugal, we'll get Spain," said Lachman.
Spain poses the biggest challenge yet for the European Union. As the third largest economy in Europe, many consider Spain too big to fail.
"You know my view is that countries like Portugal, Spain, Ireland, that they simply can't stay within the rigors of the euro," explained Lachman.
But the World Bank's Hans Timmer says talk of the euro's demise is greatly exaggerated.
"He [referring to Lachman] underestimates the determination by the European policy makers to stick to the euro and to do everything to defend it," he said.
Economists say a stable Europe is critical to the global recovery. Domenico Lombardi at Brookings says that's especially true in Africa, where European donor money represents a significant chunk of the overall budget of some countries.
"If the prospects for Europe improve then clearly Africa is going to benefit from that," he said.
Adding to the inter-connectedness of the global economy is growing consensus among experts that rapid expansion in some emerging markets is unsustainable without balanced growth in the West.
Again, the World Bank's Hans Timmer:
"Part of the problem is that increasingly unemployment becomes structural in the United States," he said. "It's concentrated in sectors that were unsustainably large during the boom period before the crisis, so you need to create employment in new sectors."
But as the old year makes way for the new one, a late but noticeable surge in U.S. consumer confidence is helping to reduce the prospects of another downturn. Still - even the most optimistic analysts say a realistic forecast for the world economy in 2011 is for more of the same - painfully slow but steady growth - amid rapidly rising debt.