The danger is that evidence of even a mild recovery in the global economy over the coming months will convince policymakers that these two issues can be either ignored or tackled in their time-honored leisurely manner.
The bottoming out of the US housing market, a pick-up in German industrial production and a recovery in Japanese exports will be hailed as proof that better days are ahead.
But this is sloppy thinking for two reasons. The first is that it assumes there are no more crises lurking out there. But it doesn’t take a genius to work out that the losses made by the banks have not gone away; the debts have simply been shifted from the private sector to the public sector. A potential meltdown in the global financial system last October was averted, but only at the risk of creating a sovereign debt crisis.
It would only take two or three of the emerging economies of Eastern Europe or Latin America to default on their debts to see doubts surface about the viability of the bigger developed economies, including Britain. The idea that the next big shock will come in the emerging markets is plausible, because these countries have been heavily dependent on foreign capital, and those flows have reversed as banks have repatriated what’s left of their capital.
The desire for good news is understandable. After the traumatic events since the collapse of Lehman Brothers in September, there is a desperate search for green shoots. They will appear. For the past six months, demand in the global economy has been met by running down excess stocks, but that cannot go on forever. What’s more, the stimulus provided from monetary policy, fiscal policy and the so-called unconventional measures such as quantitative easing is colossal. It will have an effect.
But without addressing the real issues —- a more balanced global economy and banks that are cut down to a size where they can be managed and regulated effectively — this will not be the end of the crisis. Merely half time.
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