How and When Will the Global Crisis End?

I’m writing to you from Villa d’Este in Cernobbio, Italy, where I just finished moderating a panel at the annual Ambrosetti forum.


Every year at this time, Ambrosetti holds a forum on the world, Europe and Italy. Since its beginnings in 1975, the forum has become widely regarded as one of the most important meetings worldwide.

Prominent leaders from all walks of life discuss economic and social issues facing the world. The panel I was asked to moderate focused on world economic growth and was called “How and When Will the Crisis End?”

Many people here see continued weakness for the world economy. A majority of the audience of European business people said the recovery won't likely start until 2010, and almost 40 percent believe it won’t be until the second half of next year.

The optimist of the group was University of Chicago Professor and Nobel laureate Gary Becker, who, though worried about inflation, declared "the recession is over" and believes the recovery won't be as lethargic as some others are saying. He expects a slow recovery initially but says continued strong productivity will help the economy pick up steam and lead it out of the slump. He does not expect unemployment to reach the old peak of 10.8 percent reached in 1982.

  • Unemployment Rate Jumps to 9.7%

The key issues for everyone on the panel were:

1) The world economy remains slow, and the nature of any recovery is still up for debate.

2) Emerging markets are a bright spot but not yet having a big enough impact.

3) The Fed's "exit strategy" as it unwinds stimulus efforts is critical. The wrong move has the potential to trigger a double-dip recession.

4) Structural issues remain. The recent euphoria over the recession ending and the banking system improving is actually dangerous because it has the potential to stop current momentum to reform the financial system.

Notes from the Participants

Here are highlights from what the individual participants had to say:

Gary Becker, University of Chicago and Nobel Laureate: An Optimist Outlook

  • Does not believe the recovery will be as bad as some expect
  • A flexible economy is critical.
  • The U.S. will emerge first on the global stage because of its ability to create different jobs and to be more flexible. This is what has hampered some European nations’ ability to grow.
  • Education is critical. Today, 60 percent of degrees for higher education all over the world, even in Iran, are being given to women; men are dropping. Competition in education is important.

Arcady Dvorkovich, Aide to Russian President Dmitry Medvedev: A Reflective Tone

  • “We waited too long to make decisions that could have slowed or stopped the crisis in Russia. We were extremely slow.”
  • The economy is down 10 percent this year, but Russia is ready to discuss exit strategies now.
  • People are tired of living in a panic. Russia feels better than a year ago (particularly with oil up from its lows).
  • Russia will work to be more efficient and stay open to innovation.
  • The agreement between Presidents Obama and Medvedev was very significant. Foreign policies are just as important as economic policies to global growth.

Nouriel Roubini, New York University Professor and Noted Economist: A Cautionary Approach

  • “After much stimulus bailout and a bazooka, the U.S. and the U.K. still face significant imbalances and challenges. The green shoots look more like yellow weeds to me.”
  • Roubini worries about sustained high unemployment, weak industrial production, too much supply in housing, and a continued mindset that the economy is weak, which will tend to keep pushing the savings rate higher among consumers. On housing, even if we stopped building new homes today, it would take a year at least to get rid of the supply, so prices are likely to keep falling.
  • There are “many elements of fragility, which tells me the recession won't be over at least until year end, and it’s not over yet.”
  • The financial sector is still weak, unemployment will get worse and consumers are shopped out around the world, especially in places like Spain, where unemployment is 20 percent, Ireland and Iceland. The “over savers” China, Japan, and Germany are also not stimulating demand.
  • Believes there is a risk of a double-dip recession because of the very fragile position the Fed finds itself in. Unwinding the significant stimulus policies will be difficult and require courage. Fiscal and monetary policies will have to be changed. That means higher taxes for not just the rich but middle class as well, lower spending, and the mopping up of liquidity in the form of higher interest rates. All of this probably needs to take place during still uncertain economic times when unemployment will be high. This will be tough.
  • Commodities are rising; higher prices for raw materials also adds to the upset.
  • The good news is that emerging economies are growing. Brazil and China are more robust, but these will not be enough to rescue the world. China, while growing at about 8 percent, has a GDP of $3 trillion versus $13 trillion for the U.S. That’s too small in the scheme of things to rescue the still troubled West.

Jean-Paul Fitoussi, A Leading Economist in France and Advisor to French President Nicolas Sarcozy: Status-Quo View

I asked him if we should read much into the recent growth in France. He said after several quarters of sharp contraction, three tenths of a percent growth doesn't say much. He did not seem to suggest France was any further along than it has been during this global upset.

Cheng Siwei, A leading Economic Voice in China: A Prudent Optimist

He called himself a “prudent optimist” but said not to expect China to bail out the world and to please not exaggerate China’s role. He said to remember that China is only 6 percent of the world’s economy and 15 percent of world growth. So he agreed with Nouriel Roubini that we need more than China and the emerging markets for this recovery to get traction. He said he expects a world recovery by the end of 2010 and believes China can grow 8 percent this year.

Mideast Panel

While at the conference I stopped to take in the Mideast Panel. It was remarkable to watch the body language of Shimon Peres and Amre Mousa. It seemed they could not even look at each other when they discussed differences between Israelis and Palestinians. Each one got up and went to the podium to speak.

Here are some of their comments:

Shimon Peres, President of Israel

  • Israel has decided to make peace on the basis of two states, an Israeli state and a Palestinian state.
  • Iran is a nuclear nation and has called for the destruction of Israel.
  • Peace and education bring economic vitality. “We must respect each other.”

Amre Mousa, Secretary General, League of Arab States

  • There is new evidence of a new situation. A new U.S. President who was welcomed by the world, President Obama spoke about change and he was right. He called for nuclear disarmament. “We were impressed that one of his first decisions was to reach out to the Middle East.”
  • The Arab League has put a commitment of peace on the table since 2002. “We called on Israel to do the same.”
  • Asked what will happen to the 1.5 million Arabs — Muslims and Christians — that live in the state of Israel if it’s called the Jewish State of Israel? Now Gaza, this small strip of land lives under siege.

In listening to the attendees here at the Ambrosetti conference, one thing is clear: There is still much debate over how and when the global crisis will end, and all eyes are focused dead-ahead looking for clearer signs of what’s to come. Most seem to agree, however, that the situation will be better when this forum reconvenes at this same time next year.



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