THE END OF RECOVERY AND THE START OF A NEW GLOBAL DOWNTURN

  • by Yilmaz Akyuz
  • Inter Press Service

It is growing increasingly likely that the world will face renewed risks of instability and slowdown before fully recovering from the so-called Great Recession. This is largely because the fragility and imbalances that have built up over recent years as a result of misguided policies in the US and Europe cannot be easily undone, regardless of the policy pursued today, writes Ylmaz Akyuz, the Chief Economist of the South Centre.

The strong growth we have seen in developing and emerging economies since mid-2009 is not sustainable: first, it is the product of a strong policy response to the crisis whose effects are fading in several developing economies, particularly in China. Second, the response to the crisis in advanced economies -excessive liquidity generation and sharp cuts in interest rates- is actually creating bubbles, not in Europe and US but in commodity markets and the developing world. This cheap money in search of yield is a major factor behind the rapid growth in several emerging economies, but is not there forever.

The Achilles heel of global finance is now Europe where default is a very real possibility in the highly-indebted periphery. As long as the EC and the ECB continue to pretend that this is mainly a liquidity crisis, the region will remain susceptible to extreme instability and messy defaults with the attendant consequences for capital flows and financial stability in emerging economies, similar to the aftermath of the Lehman collapse.

(*) Ylmaz Akyuz is the Chief Economist of the South Centre. For further analysis see South Bulletin, issue 56 http://www.southcentre.org.

© Inter Press Service (2011) — All Rights ReservedOriginal source: Inter Press Service

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