Financial Contagion: Not a possibility, but a reality

By: Elmé Naudé

26 July 2012

With Europe in the front line of the economic crises it is easy to underestimate the true scope of the crises on the rest of the world. Taking into consideration the large business market the Eurozone has with major world economies like the USA, China, Japan, Russia and India (not to mention the smaller economies for which these countries are responsible for). The economic crises exposed the fact that European countries no longer had the power to employ fiscal policy, which had to support their collapsing demand. Europe thus does not have the means to avoid a great depression.

This crisis could resemble the 2007-2008 world financial crises; in truth it could be much worse.If we look at some of the present signs including stock market crashes, lower housing prices, bank near-failures, high oil prices and deflation it is clear that the world economy as we know it steering towards `n potential second depression.For argument sake, to get a sense of how vulnerable the US market is for the Euro meltdown exports will experience a $153 billion loss in the first sixth months. Recent IMF research suggests that slowdowns in the US present larger threats to China`s growth than would a similar downturn in the Euro zone. a Partial breakup of the Euro zone could reduce China`s annual GDP growth by around 3% points. In a globalised world spill overs like these can manifest into a snow ball effect hence a second depression.There is no question that financial contagion will take place. Looking at trends in the world today, focusing on the big influential countries like the US who is busy growing but no employment or rather just highly skilled employment in countries like Greece with 51.2% and Spain with 51.1% and. After the 2008 global recession most of the European countries experienced an upward trend in their unemployment rates with Greece and Spain hitting a record high of 51%. With this it is apparent that there are negative growth trends for the future. Another rising question will be how the US elections currently taking place will affect future growth. Spending growth and the emergence of a new class of super consumers could be among the few bright spots as China`s economy shifts towards an era of slow growth. Spending rose with 13,8% in December 2011, meaning savings declined. It can be speculated that the world is heading toward a global slowdown.

This begs the following questions: What does this mean for the world economy in the long run? Is there still a possibility of stabilising growth as before 2008? Would it not be better if the world adopts the same mind-set as China and try to settle Europe’s debt in hope of minimising a global financial effect? If Europe can recover from their current position, can this influence the world positively? Can this financial contagion really lead to a total financial meltdown? This topic brings forth global debating, unfortunately this remains a crises that cannot be resolved overnight.  The jury is still out while the discussion rages on.

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One comment

  1. Good post. Nice combination of current trends and what it means for future developed vs emerging economy growth. But please note, in the middle paragraph there is a disjointed sentence or two that does not make sense. In the final paragraph it is not clear in which way the world should adopt the same mind set as China. Other wise, good job.

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