It's no wonder that global markets are so jittery. The world's three largest economies can't continue along their current paths, and everybody knows it. Investors watch nervously for signs that China is headed toward a hard landing, that America will sink back into recession, and that the euro zone will simply implode.
In all three cases, kicking the can down the road has staved off disaster so far, but the cans are getting bigger and heavier. Which economy will be the first to stumble on its problems?
In Europe, the tough decisions have been put off because the principal players don't agree on how or why the trouble began. Germany and the other better-off countries blame the profligacy of Greece, Portugal and Italy and fear that an early bailout would relieve pressure on them to mend their ways. For their part, the debtor nations believe that the entire euro zone is out of balance and that more prosperous countries like Germany should export less and consume more to set things right.
Other Europeans say that a shared currency cannot survive indefinitely when monetary policy is centrally managed but each government decides how much to tax and spend. Still others warn that access to market capital requires a form of collective insurance, preferably in the form of a euro bond. Not surprisingly, Germany resists this solution because it implies a gradual transfer of wealth from the core economies to the periphery, a "transfer union" from rich to poorer states.
Yet another European view holds that the austerity plans now envisioned by Germany and the European Central Bank are worse than the disease. The Continent needs growth, not just reform and belt-tightening, they argue, and only a surge of stimulus across the entire euro area can achieve it.
The 17 countries and four European institutions now entangled in the euro zone crisis will continue trying to muddle through, but their dawdling can't be sustained. Markets are already losing confidence in piecemeal reform. Doubts about Italy, an economy too big to bail, will only add to the volatility.
Europe will be the first to drop out of the game of kick the can: Expect a disorderly debt default in Greece, more trouble for European banks and a sharp recession across the continent.
In China, the need for economic reform also has become obvious. It has been four years since Premier Wen Jiabao first warned that the country's economic model is "unstable, unbalanced, uncoordinated and ultimately unsustainable" and three years since the financial crisis made clear that China's growth remains dangerously dependent on exports to Europe, America and Japan.
Read more at The Wall Street Journal
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