European solidarity is being put to the test. Was it mere rhetoric or were we serious when we said that the EU is crucial for the stable, peaceful development of Europe? We watch as Greece, Spain, Italy and Portugal struggle with their difficulties in securing public sector loans at reasonable rates while the ECB is forced to intervene and buy government bonds. Together, Germany and France make up 48 percent of the Eurozone economy and 35 percent of the EU's total economy, but now economic growth in Germany and France is weakening. If France gets into difficulties and needs help, the whole collaborative venture will probably collapse. Germany is already finding it politically difficult to meet the undertakings it has made, while Italy seems to be in greater difficulties than previously thought. The crisis is now upon Italy, one of Europe's major nations.
The situation is different in Asia. China is following its latest 5-year plan, and is in the process of rejuvenating its political leadership. The country will set aside more resources for R&D in such important areas as pharmaceuticals, sustainable energy, environmentally friendly transportation, telecommunications and space. They will also prioritize domestic consumption and growth. Double-digit growth will probably fall to 7 or 8 percent, which is still high despite the reduction. Japan is getting back on its feet after the earthquake and tsunami, but the bill will have to be paid soon. It's also unclear how the country will manage future electricity supply if there is political pressure to cut back on nuclear power.
Crises and economic growth are influenced significantly by psychological factors. The way we feel about the future is crucial. The last crisis, which began with the bankruptcy of Lehman Brothers, made the market quickly lose confidence in the ability of the financial system to withstand the pressure. All of the banks became extremely cautious and liquidity dried up. The remedy entailed nations' flooding their financial systems with money. This time around the crisis has a strong political undertone. The market no longer relies on the ability of politicians in the USA and Europe to manage the situation but feels that some countries may find things so burdensome that payment defaults and debt reductions. This will affect every country with bond holdings from the countries concerned. The risk of an increase in the already high unemployment rate in the USA and Europe is great, and this will cause consumer activity to drop. The public finance crisis forces countries to save when they should be investing, and the political strength to manage the situation through increased national revenues is lacking.
Recession is an emotive word, but Europe and the USA are on a rocky road, and it will require concerted efforts and robust measures to get economies on the move again.
Gothenburg, September, 2011
Hans Nyman, Automotive Sweden
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