In times of uncertainty in the global economy, all kinds of solutions, statistics and trends emerge in an attempt to elucidate a scene in full mutation. To some, we are knocking on the doors of hell; to others, life goes on as usual. Not rare, this is only a plethora of opinions that could cloud more than unveil what is yet to come. This is when the knowledge and experience of some of the brightest minds can help separate facts from pure hot air, the irrelevant (or biased) from what can actually change in the configuration of the global economy. EXAME interviewed some of present day's most influential economists and financial analysts in the past few days. This list includes names such as American economist Jeffrey Sachs, perhaps the most "pop" character of the global academic elite, Barry Eichengreen, one of the most respected exchange analysts, and investor Jim Rogers. In the following pages, they address the European crisis, the epicenter of the current turbulence, explain how the tottering American economy can react, and assess the most likely impacts on emerging nations and Brazil. At the end, these specialists converge to two common opinions. Abroad, there is still time to find a solution that will push the world away from chaos. Around here, the message is optimistic - if Brazil can react properly to the gravity of the moment, we will be entirely able to grow as a nation that is standing out in the dawn of this century.
Most analysts believe the crisis in developed nations can follow two distinct paths. It all depends on what happens in the next few weeks in Greece - the epicenter of the instability. The longer it takes for a solution to be reached, the greater the chances a pessimistic scenario will materialize
EUROPE
One of the least developed economies in the European Union, Greece's fate may trigger or actually prevent the crisis from spreading around the world. With 340 billion Euros in debt, the nation has been on the verge of insolvency - and the only way to avoid default is through an agreement among the continent's wealthiest countries to save it (something that had not occurred until the time this edition was closed). To analysts such as Bob Doll, Jim O’Neill, Barry Einchengreen, Jeffrey Sachs and Lupin Rahman, this organized solution is the most likely. The decision has high political costs in countries of the likes of Germany, but European leaders would have no option other than facing the wrath of their constituents and being more daring in building a way out. Germany itself would have no other choice so as to not put at risk 50 years of investments in building the European Union.
What is the future of Greece and of other nations facing sovereign debt issues?
Bob Doll — What is clear is that Greece is unable to pay its debt. And the entire world knows this. There will certainly be default. The issue is whether this will be done in an organized manner or through a chaotic restructuring process. The European authorities are in pursuit of an organized solution, and have been working together to find the best transition. In this case, they would inject resources to keep the financial system liquid and manage this transition. In the more chaotic scenario, the authorities leave the scene and default is made official. In this case, banks will have to be capitalized or even nationalized. I believe an organized solution is very likely. The problems in Greece are much more severe than those of Spain, Italy and Portugal. These three have a lot of assets they could sell and, in time, they could cover their debt. This does not mean the Greek episode will not contaminate others. That is why it is necessary to reach an organized solution. One of the things the European Central Bank (ECB) could do is buy debt bonds issued by the nations that are in the most trouble. The ECB could also guarantee the banks' deposits aiming to avoid a race to the banks. There are several ways to deal with this issue, but none of them are easy from the political viewpoint.
If Greece defaults, is another global financial crisis likely?
Jim O’Neill — Yes, there is a chance the financial system may collapse. It may be as bad as it was in 2008, during the Lehman Brothers bank crisis. This would be very damaging for the global economy. And remember: everyone is talking about Greece, but Italy is also in a very precarious situation. In this regard, a Greek default would plunge other nations into a grave situation and cause the European banking system to collapse. Other financial markets would be affected immediately. That is why the world needs to
make a great effort and force Europe to save the Euro zone's banking system. All European nations have to agree to a long-term fiscal policy plan and to issuing bonds in Euros, the so-called Eurobonds. The problem is that these decisions have to go through Germany, where the political situation is fragile, preventing chancellor Angela Merkel from resorting to a more audacious measure. To put an end to the stalemate, a shift would have to occur in the European political coalition.
Might the Euro zone snap if Greece or Germany leaves it?
Barry Eichengreen — The past few years have shown us that nearly anything can happen in the financial markets. But I believe that a fracture in the Euro zone will be avoided simply because it would be catastrophic and too expensive compared to an operation designed to save Greece, Portugal or Spain. Greece should not abandon the Euro, as this would give rise to many more problems than solutions. By restructuring its debt, Greece will face another year of recession, but it will start growing again. It is also unlikely Germany will abandon the common currency. Over the last ten years, the German economy grew because exports were up. If it dropped the Euro, it would have to create a new Mark, which would be born overvalued. That would cause the German exports to collapse, investments would freeze and the nation's economy would sink into recession. Additionally, Germany invested 50 years in building the European Union. And the block would not resist in a scenario in which the Germans abandoned the common currency unilaterally
European leaders cannot seem to reach an agreement. Is the political process putting the European Union project at risk?
Jeffrey Sachs — There is a clear loss of political will regarding the common project. And this is a capital error at this point in time, since it weakens the efforts made in the pursuit of a joint solution. The European Union is a block that brings 27 member states together. But each nation is endeavoring to take care of its own domestic politics. In this arrangement, there are completely diverse electoral and economic interests in play. This means a Finnish representative, for example, can block any alternative that may hinder its domestic demands. But I believe it is unlikely these nations will opt to fall back to the days in which each of them looked out for itself and the European Union didn't exist. The chances the Euro will implode or the European Union dissolve are minimal. This would only happen in an unlikely scenario of an all-out failure of the political process.
If the European scenario worsens, how will businesses be affected, particularly those in emerging nations?
Lupin Rahman — There are three ways emerging nations might be affected. The first is a surge in investor aversion to risk - this happened in September and pushed foreigners away, depreciating currencies and rising the companies' costs of funding abroad. Commodity prices are also a strong contamination channel. The third is a slowdown in the global GDP, which may hinder the emerging nations' economic fundamentals and, thus, their corporate results. Since the European scenario is uncertain, volatility is likely to press on. But the short-term scenario for the emerging nations is positive. These countries are better off now than in 2008. There has been an increase in reserves, and the internal economies are strong thanks to growing domestic consumption.
United States
The crisis in Europe worsens the American economy, which is already drained on account of the booming public and private indebtedness which triggered the 2008 crises. The world's biggest economy is skidding with so-far unsuccessful attempts to drive investments, recover competitiveness and create jobs. The high unemployment rate among young people is one the worst problems because it compromises the future. But, as economist José Alexandre Scheinkman says, even with shaken confidence, the American capacity for innovation can surprise.
What went wrong with the American economy?
Jim Rogers — The United States has faced a recession every four to six years. It has been like that ever since I was young - and I am now 68 years old. But expenditure and indebtedness are now much higher. This means things will get even worse for the United States and for the global economy in the next couple of years. This crisis will be worse than the 2008 one because the US has already used all its weapons. The truth is Americans made too many mistakes in the past 50 years, beginning with the Vietnam War. Since then, the US went from a major global creditor to the biggest debtor in the world. And you can't just wake up one day and say everything has been solved and think all problems have vanished. You need to assume your mistakes - and your debt. What usually happens in recessions is that debt is liquidated and people lose money. But so far nobody has incurred a great loss. There was a huge transfer of debt from the private to the public sector. That is why the U.S. government's indebtedness ballooned. We increased our indebtedness and refused to allow people and institutions to break or go bankrupt. And now part of this debt has to be liquidated. The United States cannot continue growing its indebtedness without this leading a new disaster. The Japanese went through this in the 90s and it did not work. Japan lost a decade - and then another one! If the United States continues on the current path, it will also lose one or two decades.
Will the plans to cut public expenditure, create jobs, and change the profile of the American debt help the US resume growth?
Jeffrey Sachs — The government is going down the wrong path with short-term stimuli, which are not appropriate to overcome the United States' true challenges. The American economy no longer responds to this type of measure, which does not help restore trust or bring back investments or consumption. The Federal Reserve, the US central bank, may even intervene in market liquidity, but it is unable to unite any of the knots in Congress on account of the 2012 elections. In the twist operation (the exchange of government bonds for short-term bonds in order to lower interest rates) case, reactions were very negative. Days after announced, the US stock exchange nose-dove 6%. I also believe that creating low-quality jobs with last-minute projects is far from desirable. I really can't understand the Obama administration's strategy of trying to invigorate real estate sales at a time when consumers are in debt and need to save more. We have just witnessed the real estate bubble burst, and I can't see how this will be reversed on the short-term. That is why stimulus programs usually fail. We need to drive long-term investments and boost the capacity to export products that translate American competitiveness and productivity. But we have not done that.
What are the consequences of a high level of unemployment persisting for a long time in the United States?
Barry Eichengreen — If we are lucky, the United States will grow 1.5% in 2011, an extremely low rate. In other words, unemployment will remain high. This is very bad not only politically, but also for the future of the economy. If young people are unemployed for very long, they will only start competing for low-paying jobs. The scenario can be temporary jobs, those that require no training. Therefore, they will be less productive. And lower income over the life of the workers would drive more income inequality in the country.
Are Americans at risk of a new recession?
José Alexandre Scheinkman — The United States has gone through a severe banking crisis. Even in the best possible political scenario, the American economy would naturally grow little after this crisis. Add to that the deep divergences between Democrats and Republicans, further complicating the decision-making process concerning measures that must be taken. In other words, the overall picture is less positive. However, even with all of these difficulties, there are still sectors of the American economy that are still growing, particularly in the technology area, even if the financial system is tottering. Not that I am optimistic. But it is good to remember that we can always be surprised by the American capacity for innovation.
EMERGING NATIONS
While in the last global crisis emerging nations such as China, Brazil, India and Russia came through the financial market roughness rather well, it is still not clear whether they will be able to repeat their performances. Emerging nations have their own set of issues to deal with. Heated economies, real estate bubbles and high inflation rates are the challenges developing markets will have to handle
Might the European crisis and a new recession in the United States impact the economy in China and other emerging nations?
Jim O’Neill — China's main problem is not Europe or Greece, rather inflation. The Chinese need to keep inflation at bay, at 4% more or less. China needs to enter a phase in which growth will be of better quality, and most likely not as strong as it was over the past decade. The country is expected to grow 7% to 8% in the next five years and thereafter. In a certain sense, these crises in the United States and in Europe are good for China. They force the Chinese to realize that their country's future depends on decisions affecting only their own economy, and not their exports. It may seem odd, but I really believe the crises have helped China position itself around the world. Over the past few weeks, for example, the Chinese have been accelerating the use of the Yuan on the International market. Rumors are that they are promoting the full convertibility of the Chinese currency by 2015. Part of this comes from the concern with instability in the United States and Europe. I also believe that this reality applies to all other emerging nations. The members of the Bric - Brazil, Russia, India and China - are increasingly important in the world, particularly in trade. Take India, for example, which I believe is lagging about ten years behind China. With its growth, India is moving towards importing increasingly large amounts of commodities - just as China is doing today. In this regard, Brazil is a supplier that stands to gain.
What do the emerging nations need to do to shelter themselves from the crisis coming from the wealthy ones?
Jim Rogers — It is undeniable that if the United States and Europe grow at a slower pace, China and other major emerging nations will be impacted. But the only thing emerging economies can do is try not to increase their own indebtedness. After all, all it takes is a glance at what is going on in the wealthy nations to realize that unbalance is wheat led them to chaos. Emerging nations must also be attentive to inflation - there are repeated episodes of steep prices and a heated real estate industry in China, India and Brazil. In the case of inflation, acting quickly is the key, otherwise things will get worse. It is no surprise China has been trying to cool its economy off in the past few years. The Chinese have already increased their interest rates six times. Emerging nations will also have to resist the temptation of adopting protectionist measures. Historically, protectionism has been adopted in times of crisis. By and large, results are very bad over the long haul.
The Chinese economy turned into the main engine of the global economy. Even after the crisis, will it be able to sustain a 10% growth rate in the future?
Peter Schwartz — What the Chinese have done managing their economy in the past decade is impressive. They got through the 2007 and 2008 crises incredibly well, both in the financial sector and in the overall economy. It is true there are risks right now, but they do not compare to those that were overcome recently. Therefore, once again, China may do well in the foreign turbulence. The fact is that demand for Chinese products in Europe and in the United States is significant and any reduction will be felt. But it is also true that internal demand in China is surging. One change compensates for the other. China has already been able to get 300 million people out of poverty. And a billion other Chinese still need to ascend economically. In other words, there are 20 Koreas to be put on their feet. This billion people will need education, housing and food, everything the first 300 million are now gaining access to.
With reporting by Giuliana Napolitano