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20 May, 2013

Global economy will face a major relapse of the 2008-2009 downturn if developed economies do not deal with obvious risks

Interviewed by Lyubomyr Shavalyuk

Jean-Luc Gréau is one of the few analysts who predicted the 2007-08 financial crisis in the US in he book, L'Avenir du Capitalisme (The Future of Capitalism) published in 2005. At the end of April, The Ukrainian Week invited him to a panel discussion on ways for developing countries and Ukraine to achieve economic growth in the global context. In his interview, he projected a new wave of financial crisis – this time coming from Europe and China.   

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UW: In your opinion, what are the key risks for the global economy in 2013?  

Significant short-term risks are obvious for the world’s leading economies. The first one comes from the deepening decline of the EU economy, ruining companies and productive employment. This makes public finance very vulnerable, weakened by decreased tax revenues and threatens to leave banks with more bad debt. Economic decline is caused by the EU’s decision to support the unviable Eurozone and austerity policies. All Eurozone countries have now switched to tough measures: none can rely on assistance from its neighbours to improve their situation.  

The economic media is ever more abuzz about the second risk. China is struggling with the bubble caused by the lending boom that has burdened territorial communities and construction companies working as government subcontractors. These obstacles are rooted in China’s economic stimulation policy, launched in 2008 and based on public and private investment. As a result, investment makes up half of China’s GDP today, creating disproportions. Many provinces see no solution to their financial problems and take out new loans to repay old ones.  It is anticipated that these loan bubbles will start bursting in 2014 or later.

These are significant risks that lie on the surface. If they materialize, the aftermath will hit equipment producers, including the US, Germany and Japan, as well as suppliers of raw materials.

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UWWhat measures can prevent the second surge of the global financial crisis?

As regards European countries, preventive measures are as follows. First of all, they need to reconstruct the Eurozone around four or five currencies. This would be more realistic than having just one currency, the world’s most overpriced one. Secondly, the most efficient economies, such as Germany and Netherlands, should establish the highest pay for work.

To deal with China’s risks, its government has to declare the bankruptcy of insolvent provinces and take over their debt, in order to avoid banking and stock market collapses. Its responsibility is to gradually switch the direction of the Chinese economy to facilitate consumption with higher wages that will make work much more productive.

UWHow do you see the development of the global economy over the next 3-5 years if developed economies do not change their policies?

Then, unfortunately, the two risks I mentioned will soon become a reality. They will lead to a major relapse of the 2008-2009 downturn if nothing is done to prevent them.

UWWhat should developing economies do to have sustainable economic growth amidst global instability?

Developing economies should take efforts to build their own development models. To do so, they need to find their unique strong points and the advantages generated by one type of production over another. Even countries that are at not yet highly developed can find unique niches into which to channel their efforts. The biggest risk here, however, is to prevent excessive focus on just one industry.

Two other issues that deserve more detailed attention are a sound banking system, oriented at funding both old and new production, as well as measures to boost the capitalization of companies to guarantee their independence and stability.

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UWWhat could prevent a second recession in the past five years in Ukraine?

This will be a challenge for Ukraine, given the economic drama unfolding in Europe. The Ukrainian government should have foreseen this and come up with measures in advance, to support an adequate level of business activity and cushion the blow of the downturn in Europe.

UWUkraine’s government talks about state support for national producers as virtually a panacea against all economic problems. Can protectionism facilitate the growth of the Ukrainian economy?

None of those who mention protectionism is an advocate of borders that are completely closed. Still, reasonable commercial protectionism forces local producers to act in such a way, as to become competitive. One example is the preference of foreign investors to organize production in Ukraine over the export of their products into the country. 

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