The Double-Edged Sword Of Globalization And The Case For Keynes
Op-Ed: Emerging countries are wobbling, Italy is paying record interest rates, and the Germans are on alert. With the next economic crisis gathering like a winter storm, politicians must act quickly – never forgetting the lessons of a certain 20th-century
MUNICH -- One advantage of globalization is that Germany is now dependent on many other countries and their growth reduces Germany's own problems. Flip it around, however, and that's also what is bad about globalization: because Germany depends on many other countries, their problems cut into German growth.
Right now, with economic profit warnings emanating from all over the globe, the crucial question is: how well – or how badly – are governments reacting to the impending economic crisis? And what does that mean for Germany's growth, and for its problems?
On Wednesday, the Munich-based IFO Institute gave pessimists an opportunity to become even more pessimistic. Their forecast has the German economy slowing down to 0.4% growth in 2012, or about a tenth of what it was this year. That's a shock. As late as October, all research pointed to growth of at least double the figure just released by the IFO.
The reasons underlying the forecast are clear: the European debt crisis; recessions sharpened by savings packages in afflicted euro-countries; and the global downturn. Equally clear is what Europe's governments must do to face the situation: they must solve the debt crisis that has become a crisis of confidence inhibiting businesses and consumers around the world.
Impressive promises for stability were issued at the most recent E.U. summit. But there was no real rescue -- the debt crisis was most certainly not solved, as Italy's record interest rates on Wednesday showed.
Because we live with the double-edged sword of globalization, this euro strategy is quite simply not enough. After the 2008 financial crisis, Germany freed itself quickly from recession thanks to the boom in emerging countries. This time too, Germany depends on China, India and Brazil. Except that now they're wobbling too. Just how bad the global downturn gets will depend on the governments – all of them. There is no such thing as a national economic policy without international effects.
The case for a Keynsian approach
First: the international community must avoid falling back on protectionism. In this sense, China's imposition of tariffs on U.S. cars sets a bad example. During the early days of the last crisis, discrimination against foreign companies just made things worse.
Second: industrialized and emerging nations alike need to work on systemic weaknesses that are exacerbating the crisis. Brazil, for example, has low rates of savings, and a benchmark interest rate of 11% that puts the brakes on business. India is sealing sectors like retail off from foreign investors, which is why it's short of the capital needed to develop into a modern economy. Because the aversion to foreigners still runs deep after the East India Company's 17th century exploits, the government had to put on hold its plan to open the country up to investors like Walmart.
Third: it will be important for the West and boom countries to work actively together to prevent sharp decline. Since the financial crisis – when swift reaction from the United States, China and Europe, economic programs and cheap money from the central banks prevented a 1930s-style depression -- it has been manifestly clear that the state cannot stay out of it.
John Maynard Keynes is not dead: in fact, his ideas are the most pertinent ones out there right now. The problem is that governments don't have enough money: they are pressured by higher debts than they were before the financial crisis. Let's just hope the IFO prognosis is right and that the downturn will be milder than it was in 2009.
Read the original article in German
Photo - Ed Yourdon