The Global Economy in Turbulent Times

CHAPTER 44 Dark Clouds over Europe and the United States¹

Within the past couple of weeks since mid-2011, the world has changed. From a world so used to the United States playing a key leadership role in shaping global economic affairs to one now going through a multi-speed recovery, with the emerging nations providing the main source of growth and opportunity. This is a very rapid change indeed in historical time. What happened?

First, the convergence of a series of events in Europe (contagion of the open-ended debt crisis jolted France and spread to Italy and Spain, forcing the European Central Bank [ECB] to buy their bonds) and in the United States (last-minute lifting of the debt ceiling in early 2011 exposed the dysfunctional US political system, and the Standard & Poor’s [S&P] downgrade of the US credit rating) has led to a loss of confidence by markets across the Atlantic in the effectiveness of the political leadership in resolving key problems confronting the developed world.

Second, these events, combined with the coming together of poor economic outcomes involving the fragilities of recovery, have pushed the world into what the president of the World Bank called “a new danger zone,” with no fresh solutions in sight.² Growth in leading world economies slowed for the fourth consecutive quarter, gaining just 0.2 percent in the second quarter of 2011 (0.3 percent in the first quarter of 2011) according to the Organisation for Economic Co-operation and Development (OECD). ...