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Ignoring the Storm
Published in Daily News Egypt on 26 - 11 - 2007

The most recent G7 finance ministers' meeting in October was an utter failure. The only thing that they agreed on was to admonish China to revalue its currency. The yuan's value, while important, is not the central question facing the world economy today. The real immediate problem concerns what is happening and what will happen to the dollar. But the real issue for prosperity concerns the foundations of the global financial system.
How low will the dollar go? How can we undo the imbalances of economies - China, followed far behind by Europe - exporting massively to the United States or to the dollar zone? Will the US mortgage market, which is expected to become even more difficult in 2008, subside into calm afterwards, or will it contaminate the whole international financial system? Is there a risk that rising oil prices - already reaching all-time highs - will cause further debt defaults worldwide? The spate of earning reports from America's biggest banks suggests that there are real worries here.
The condition of the world economy nowadays is very strange. There are no great shocks but various declines and crises. Central bankers try to soothe and reassure, but they are not very convincing. Governments are silent, acting more or less as if nothing important is happening. And, according to many economists, commentators, and journalists, today's worries are temporary, solvable difficulties. There is no general crisis on the horizon.
I disagree. I believe that we have entered a period of weakening across the different parts of the global economic system, and that this may lead to a global recession. This weakening calls for a strong international public response, including tighter regulation, if we are to avoid such a crisis.
Why does the world economy look so flimsy? First, the way capitalism operates nowadays has changed mightily from just 30 years ago. In developed countries from 1945 to 1975, capitalism brought rapid growth, an average of 5 percent per year for long periods. Of course, it was subject to ups and downs, but it was not subject to financial crises of the type that we see regularly today. Moreover, capitalism in the post-WWII decades maintained full employment, with unemployment often hovering around 2 percent in Europe, North America, and Japan. Job insecurity back then was mostly unknown and mass poverty had disappeared.
The keys to that period of growth and happiness were a strong social welfare system and mainly Keynesian domestic and foreign economic policies in all the world's big states. Above all, every developed economy pursued policies designed to provide high wages, which would guarantee high consumption and thus rapid growth. Shareholders used to put up with relatively meager dividends compared to today.
Thirty years on, shareholders have broken definitively with this system. Pension, investment, and hedge funds have taken the lead in this revolution. In all developed economies, profits have leaped spectacularly in the past 25 years, by between 8 percent and 10 percent of GDP. But wages and social security revenues have suffered an equivalent cut.
As a result, growth has weak underpinnings. Everywhere, labor is becoming insecure and mass poverty has reappeared in developed countries. As economic deregulation increased, financial crises began erupting: since 1990, there have been three distinct crises in Latin America, one each in Russia and Asia, the Internet bubble, and now the sub-prime crisis.
Second, over the past 6-7 years, strong GDP growth in the US and Great Britain has been offset by staggering debt. The US now borrows $2 billion a day, 95 percent of it from Asia and 45 percent of that amount from China's central bank. America's total debt exceeds $39 trillion, or roughly 3.5 times US GDP.
This situation will remain manageable only if oil prices stop increasing. And yet, the opposite is more likely, with domestic inflation - a danger aggravated by central banks' loosening of money supply to help commercial banks - bringing the threat of higher interest rates.
Finally, while assets nowadays are much more liquid, this has not boosted long-term productive investment. Instead, the profitable carving up of healthy companies has freed up capital to flow to intangible assets, houses and other forms of real estate, fueling a speculative crisis. In short, the global economy - replete with get-rich-quick schemes, overpaid bosses, and corporate fraud - has lost its moral bearings.
We cannot let those dangerous trends continue unchecked. We are obviously sailing toward the rocks, and the whole developed world should be concerned. There is an urgent need for a global conference - a Bretton Woods II - to adopt strict rules to contain today's wayward financial markets. Unfortunately, as the most recent G7 meeting showed, the world's major governments are not yet ready to act.
Michel Rocard, former Prime Minister of France and leader of the Socialist Party, is a member of the European Parliament. This article is published by Daily News Egypt in collaboration with Project Syndicate, www.project-syndicate.org.


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