This makes salutary reading -- from Der Speigel of today:
'It Will Be Terrible'
Economists in Davos Look with Concern to 2010
By Anne Seith in Davos
Many countries have started to see a rebound from last year's economic
recession. But will it last? Economists at the World Economic Forum in
Davos warn that paying down massive public debt will be "very, very
painful." Deep spending cuts and significant tax hikes may be unavoidable.
For those now in their 30s, Kenneth Rogoff has bad news. "It will be
terrible for you," the Harvard University economics professor told a young
German at the World Economic Forum in Davos. "Germany's debt is exploding,
the population is aging," he said. "And to be honest, I think your country
is going to have average growth of just 1 percent in the coming years."
Rogoff went on to say that, should Germany wish to begin making inroads
into its mountain of debt, there is no way around strict savings measures
and significant tax increases. "It will be very, very painful," Rogoff
said, adding that it will take at least a decade, and possibly many more,
for Germany to pay down its debt.
He wasn't the only one in Davos with a dark vision of the future. Many
countries could be stricken with the "Japan illness," Robert Shiller, a
behavioral economist at Yale University, told SPIEGEL ONLINE. Following a
financial crisis in the 1980s, Japan's economy remained in the doldrums for
years as trust in the economy's ability to recover evaporated. Few were
willing to take risks, sapping the Japanese economy of its life blood, said
Shiller. "Such a situation could take hold in many regions of the world."
Such prognoses raise questions about the recent global economic recovery,
modest though it may be. Is a second recession just around the corner, part
two of what some warn could be a "double dip?" In the fourth quarter of
2009, the US economy grew by an impressive 5.7 percent -- but how durable
are such gains?
'Historically Exceptional'
One thing is clear: 2010 presents steep challenges to the world economy.
"There is an illusion of normalcy," Rogoff warns. But that illusion, he
points out, comes largely as a result of the immense amount of money pumped
into the economy by governments around the world. The result -- massive
public debt across the globe -- is "historically exceptional," Rogoff says.
The only comparable situation can be found during the Great Depression, he
points out.
The question now is when to shift priorities. When can one begin focusing
on paying down public debt without immediately stifling the fragile
recovery? And, of course, will taxpayers play along?
"In the US, for example, any politician who tries to significantly raise
taxes would be gone immediately," Rogoff is convinced. "We haven't had to
tighten our belts for 50 years." Shiller says he can already sense a
widespread feeling of anger among his compatriots -- a degree of anger, he
said, that hasn't been felt among the America populace since the Vietnam War.
The situation isn't much different in many other countries in the
industrialized world.
Conducive for the Rumor Mill
It is the situation in Greece, however, that shows just how dangerous the
situation has become. The country is facing public debt that is 110 percent
of its GDP -- a state of affairs which has proven conducive for the rumor
mill. Last week, it was said that Greece was looking for money from China;
others reported that Athens might extract itself from the common European
currency, the euro; still others said that Germany and other EU countries
were preparing a bailout package for Greece.
Denials from the Greek government did little to help. Greece saw its
borrowing costs rise sharply amid a hike in interest rates. "Such stories
frighten investors," says Shiller.
It might only be a matter of time until similar stories destroy investor
confidence in other countries too. "Currently, the world is still keen to
lend us money," said Rogoff referring to the US. "But that will not
continue forever."
In Europe there are already warnings that a domino effect could spread from
Greece. The finances of countries like Ireland, Spain and Portugal are in a
similarly sorry state.
Stress Test for the Euro
The Greek crisis is also a dangerous stress test for the euro, as it
presents the rest of the euro-zone members with a tricky dilemma. If they
were to help out Greece financially, it would set a risky precedent --
other countries with shaky finances could in the future rely on being
bailed out in an emergency. The financial markets would suddenly require
risk premiums for bonds even from countries like Germany, because of the
possibility that they might have to rescue their weak neighbors.
But if the euro-zone members were to leave Greece to its own devices and
the state went bankrupt, the impact on the single currency would be
disastrous. "The euro is getting more and more important as a reserve
currency," says Shiller. "People believe that euro-denominated debt is
safe." A state bankruptcy would profoundly shake that confidence, Shiller
warns.
There are also those who are spreading cautious optimism and drawing
attention to glimmers of hope. The head of the International Monetary Fund,
Dominique Strauss-Kahn, said in Davos that growth was returning faster than
expected. He pointed to the fact that Asia has already almost completely
recovered from the crisis, with the Chinese economy growing by 8.7 percent
last year.
Industry in Turmoil
It seems that 2010 will be the decisive year. As well as showing whether
the recovery is sustainable, this will also be the year when the
international community finally puts concrete proposals on the table
regarding the implementation of the G-20's much-discussed goals.
Barack Obama's recent proposals to separate traditional commercial and
investment banks and to stop banks from engaging in so-called proprietary
trading with their own money, have added plenty of fuel to the debate. The
international financial services industry is in turmoil as a result of the
plan.
Few bankers have responded to the ideas as calmly as Martin Blessing, the
head of Germany's Commerzbank, who told the Frankfurter Allgemeine
Sonntagszeitung that "the basic idea is reasonable." "We have seen over the
last two years that the current system has flaws and we can not just return
to normalcy."
At the beginning of the summit, Deutsche Bank CEO Josef Ackermann had
warned against Obama's plan. "In the end, we could all be losers if we no
longer have efficient markets," he said.
'No Impact on Policy'
On Saturday in Davos, Ackermann and other financial representatives met
behind closed doors with politicians such as French Finance Minister
Christine Lagarde, her British counterpart Alistair Darling, EU Economic
Affairs Commissioner Joaquin Almunia, ECB President Jean-Claude Trichet and
IMF Managing Director Dominique Strauss-Kahn.
However, it appears that little agreement was reached. American Congressman
Barney Frank, who heads the House Financial Services Committee, said after
the meeting that the Obama administration was determined to push through
"tough, sensible regulation." "It is very important to tell the banks and
hedge funds what we will do," he added. Asked about the reaction from the
financial world, Frank answered: "It doesn't concern me. That has no impact
on policy."
However, Rogoff is skeptical about the degree to which Obama's proposals
can be put into practice or if they can serve as an example for the rest of
the world. "Obama has already made many good speeches," he says. The
question is whether he will obtain the necessary majorities to make his
ideas reality.
Keith Hudson, Saltford, England
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