The OECD's new assessment of the macro-economic situation makes for pretty grim reading. And their forecast of very sluggish global growth (just 1.6 per cent for the OECD area in 2012) is based on an increasingly incredible view that the Eurozone will "muddle through" and experience only a mild recession.
They do not seem to have convinced even themselves that this is really the most likely outcome.
They make some fairly heroic assumptions to get to their weak growth scenario. Noting that the legislatively mandated cuts to government spending in the U.S. amounting to 2 per cent of GDP in 2012 would tip that country into recession, they assume that fiscal tightening will be a much more limited 0.5 per cent of GDP. They assume further interest rate cuts by the ECB, and continued very loose monetary policy in the U.S., the U.K., Japan and elsewhere.
While nothing really, really bad is forecast to happen in the Eurozone in the central projection, in Box 1.5 (p.49) they set out a scenario in which the spread of "contagion" to Italy and beyond leads to a financial crisis and a collapse of real business investment and consumer confidence roughly similar to that experienced after the fall of Lehman Brothers in the Fall of 2008, with the impacts on the U.S. being at least as great as in the Eurozone itself. The OECD growth rate would fall by 2 per cent of GDP in 2012 compared to the 1.6 per cent baseline. And that relapse into recession scenario itself assumes that no country leaves the Eurozone.
There is an extended discussion -- from p.39 -- on the crisis mechanisms that would come into play in a deepening of the Euro crisis. Sovereign debt defaults would likely lead to an international banking crisis as well as a collapse of business and consumer confidence. It is noted that very little is known about non-bank holders of European sovereign debt and, crucially, credit default swaps on that debt. It is extraordinary that, three years after the collapse of much of the U.S. shadow banking system, very little is known about where the Eurozone default risks are concentrated. (e.g. at p.47: "Little is known about the exposure of U.S. and Japanese non-bank financial institutions to the euro area countries."
The OECD are pretty weak on solutions. They call for easing of fiscal restraint in the U.S. (from a currently anticipated level of 2 per cent of GDP), but say that in the Euro area "planned consolidation must be implemented to regain confidence." (p.36.) It is interesting to note (See Table 1.4) that if the Euro area is taken as a whole, it is in much better fiscal shape than the U.S. But the markets must, apparently, be appeased regardless of the facts on the ground.
In a worse case scenario where countries left the euro, Armageddon:
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"If everything came to a head, with governments and banking systems under extreme pressure in some or all of the vulnerable countries, the political fall-out would be dramatic and pressures for euro area exit could be intense. The establishment and likely large exchange rates changes of the new national currencies could imply large losses for debt and asset holders, including banks that could become insolvent. Such turbulence in Europe, with the massive wealth destruction, bankruptcies and a collapse in confidence in European integration and co-operation, would most likely result in a deep depression in both the existing and remaining euro area countries as well as in the world economy." (p.53.)
An upside scenario, by contrast, would require euro area guarantees on all sovereign debt, backed by ample resources, and most likely involving the European Central Bank. Exactly what seems to still be a political non-starter for Germany.
This article was first posted on The Progressive Economics Forum.
It is clear that the OECD, most financial and economic commentators, and capital markets, are all in a state of deep denial. The question is not whether the contagion afflicting Greece, Portugal, Ireland, Spain, Italy, (. . . Belgium, France . . .) will spread to the rest of Europe, and (if that happens) whether we will catch it in North America and elsewhere. The real story is that Europe has perhaps the most advanced case of the contagion that has infected the entire globalized world.
If you doubt that, take a look at this chart. Chinese exports to Europe are collapsing, and those to North America are not all that far behind. The Chinese offshoot of the Western economic bubble was kept inflated through massive government spending in that country after the Crash, but the essentially parasitic nature of the Chinese "economic miracle" has caught up with itself. Today, China has little room to manoeuvre, either. Their deliberate policy of suppressing wages to produce exagerrated rates of GDP growth prevented the development of a domestic market robust enough to carry the economy, in the absence of strong exports of consumer goods subsidized by cheap wages and an undervalued currency.
No wonder China is not coming to the aid of Europe, by buying billions of Euro of bad debt from teetering countries and banks there. China has enough structural problems in its own economy to keep its hands full. They have their own accelerating waves of shutdowns, layoffs and strikes.
Capitalism is entering a deeper stage of crisis, now magnified for the first time in history to a truly global scale.
So where is socialism, now that the world really needs it?