Newsletters
Global Economy: where are the world leaders bringing us?
June 24, 2011

Zelia Cardoso de Mello - Global Economy: where are the world leaders bringing us? We are blasted every day with news coming from all sorts of media sources that there comes a point, I think, at which we lose perspective of the big picture, of what is actually happening. When we put all the daily headlines together, we realize the staggering amount of bad news in 2011: unresolved economic crises add to natural disasters that seem more frequent than ever, costing lives and millions of dollars. North Africa has been the stage of democratic revolutions now dragging on for months to the point that they are no longer fresh news, also costing lives and leading to hundreds of people fleeing to other countries to escape violence. The so-called revolution led to the end of decade-long dictatorships, but also led to a big question mark about the future and about the possibility of a democratic regimen as we know it in the western world. In Egypt, Islam radicals are blocking roads, burning churches and killing Christians. In cyberspace, hackers are breaking down corporations like Sony, Lockheed and even the IMF; they have accessed more than 200,000 files of Citibank credit holders. The Europeans are in the midst of a crisis that threatens the European Union. The former potential candidate for the presidency of France is under house arrest in NY, charged with rape. In the US, Congress cannot agree about anything, while unemployment remains at 9% in contrast with the financial health of the corporations and particularly the banks that caused the financial crisis. Although a substantial part of homeowners all over the country are fighting to pay their mortgages, in New York, overly ostentatious 30 million dollar apartments are disputed in bidding wars. Japan suffered an earthquake and tsunami that caused deaths, economic disruption and led to questioning the nuclear choice not only in Japan but in other parts of the world. In China, there have been waves of protests in urban areas in the last three weeks, while the real estate bubble starts to pop.

Brazil may off the appearance of an oasis in the desert, the calm spot in the storm, but the new Government has already faced its first crisis, leading to Palocci's resignation and reminding us that President Lula is closer and more active than ever, ready to intervene if necessary. Subsequently, the discharge of Cesare Batiste, a murderer and terrorist, cast a shadow on the higher court of the country.

From here, it looks like Brazil has finally conquered its place in the world. When I arrived in New York, 14 years ago, Brazil was identified with "Carnaval", soccer and Pele. Very little was known about this huge country, just south of the United States; even educated people thought we lived in jungles and spoke Spanish. Nowadays Brazil is identified with economic growth, a strong democracy, a growing market, a potential (and friendly) oil supplier; a country that is ahead in alternative energy, that exports aircrafts, and has beautiful beaches. However, the downturn of the Bovespa last week served as a reminder that in the new global world there are no calm islands; when it comes to pain, there is pain for everybody.

With so many subjects it was hard to pick one to write about, but I ended up choosing the European crisis. The way I see it, the Greek problem will not be solved with the release of another installment of last year's bailout. We are repeating last year's episode: emergency funding is given and the Greeks promise to solve their fiscal problems, but eventually, they don't succeed and then they need more funding, leading to more unfulfilled promises. Despite the budget cuts that cause so much pain, the deficit is now wider than projected last year. The Government failed to cut spending or raise revenues as promised. Unfortunately, the very nature of the European Union and the creation of the Euro is the root of the problems; different countries with different economies have the same currency but not the same treasury and do not have the same fiscal policy. Greece and others borrowed at the same rate as Germany and France and created bubbles that burst. The pattern is that fiscal cuts have only accomplished more unemployment and loss of tax revenue, creating a vicious cycle of devastation. If Greece had its own currency it could make the adjustment through depreciation, but this is not the case.

In the last few weeks, the German suggestion that the banks should accept a restructuring of the debt has disturbed the markets. The French opposed the suggestion (maybe because the French banks hold the majority of the Greek debt or have direct exposure to Greece) and finally on Friday after a meeting between Merkel and Sarkozy the Germans backed off. The ECB President, Jean Claude Trichet, has opposed any form of restructuring and used the words "contagion", "contamination", and "disaster "to justify his position. The ECB has not been exempt from debt itself. It is interesting that Trichet was the president of the Club de Paris- I have been with him many times trying to renegotiate the Brazilian debt, unsuccessfully, when Brazil and other emergent finally restructured their debt via the Brady Plan. Trichet should look back upon his own history and learn from the past.

Last year, when talking about Greece, George Soros said, "the world's leaders urgently need to learn that they have to lead markets and not seek to follow them". It seems more appropriate than ever. In the USA, with the excuse of avoiding a disaster, banks were rescued with tax payers' money. That action and the wars, were the main causes of the large deficit, not the "stimulus". Now, the solution seems to be to cut spending, meaning cutting programs that benefit the people that most need them, those people that are suffering the harshest consequences of the slow growth. Meanwhile, the billionaires remain untouched, generously gifted with tax exemptions that do not contribute to economic growth.

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