Baltic Business Research

Below, you can read the summary of a speech I held at the Conference
“Capital Markets in the Post-Crisis Environment”
arranged by the Global Interdependence Center (GIC) in Rome, April 6-8, 2011

“Finance and Economic Recovery”

Summary

   2010 turned out to be quite a good year for the global economy – at least when we look at a couple of numbers. World trade increased by 12 percent. Impressive – but we should keep in mind that this recovery started from a very depressed level. Asia (Japan excluded) performed well in the past year. So did Latin America and some OECD countries – with Germany as the most positive surprise.
   However, the European development was very divided in 2010. The recovery in Eastern Europe proved to be quite weak – if we exclude Poland, a kind of Eastern/Central European superstar during the dark days of the global financial crisis. The most alarming disappointments in this part of the world came, however, from the European sovereign debt crisis that emerged around a year ago.
   Other still existing concerns that became more visible during 2010 and the beginning of 2011 were rising commodity prices (oil and food!), public debt trends in countries also outside the Euro area (U.S., Japan, UK – all of them with budget deficits around 8-9 percent), increasing inflationary expectations, the situation in Northern Africa and the Middle East, and the catastrophe in Japan.
   For a European economist like me a couple of questions or statements may be permitted regarding the U.S. economy. GDP growth during the ongoing recovery is clearly slower than the average for all post war recoveries. Thus, the output gap is still very wide. The decline of unemployment rates must be interpreted as slow. The rate of employment has been coming down to below 59 percent. Home ownership has reached an 11-year low. Last but not least, government debt has entered uncomfortable regions. This leads us to the question: is any optimism about the U.S. economy justified?
The situation in Japan certainly makes all of us very sad. Forecasts on Japan currently make no sense. Maybe we should prefer to discuss whether Japan has the potential, the fighting spirit, and other requirements to come back and successfully reconstruct the country. I actually think so.
   Europe finally. Today, many of us are really surprised that Germany has recovered so well. Sure, the good GDP growth of 2010 (+3.6%) will not quite be repeated in 2011 and 2012. But economic fundamentals have been improved. This is important. I would like to raise the question whether Germany can find its way back to its previous position as the locomotive of Europe – or are we seeing some kind of overconfidence? A minority of discussants even argues that the sovereign debt crisis in a number of European countries – which is a better term than talking about a European crisis – will be positive in a longer perspective. Will the EU and the Euro area emerge from the crisis in a structurally better shape than before the eruption of the crisis? A positive answer later on would be very positive for the Euro. In my eyes, the time has come to discuss the euro less emotionally, as, for instance, the Chinese seem to do.