Op-Ed Contributors

Ready for the next big one?

By Stephane Garelli (China Daily)
Updated: 2010-09-17 07:42

Raymond Barre, former French prime minister and author of numerous economics textbooks, once told me: "One of the few things we know about economics is that it has cycles - the problem is that we do not know when they start, how long they last and why they end."

The stigma of modern economics is that we still do not know how to avoid recessions and unemployment. This is my fifth recession. Some of the repercussions I have seen were expected, while others were totally new.

Kill and overkill - a recession is a costly experience. The European Central Bank estimates that the total amount spent on areas such as recapitalization, guarantees and toxic assets on both sides of the Atlantic was 27 percent of GDP, or a staggering $7.2 trillion! Budget deficits are in excess of 11 percent of GDP in the US and 6 percent in Europe. The total debt of the G20 nations will reach 106 percent of their GDP this year. Did we have a choice? Probably not!

The market only understands "big money" and - just like in a poker game - only respects a player that is ready to place a huge and unlimited amount of money on the table.

Recessions occur at regular intervals. In the US, there have been 32 recessions since 1854. Globally, the four most recent recessions were experienced in July 1981, July 1990, March 2001 and December 2007. If the same pattern is repeated, the next recession will probably take place nine to 10 years from now.

It is doubtful if many governments will have enough time to restore public finance to confront the next "big one". In addition, the "real" debt of nations is deeper than reported. The US national public debt exceeds $13 trillion. And if we include local debt plus Medicare and social security, it could be more than $105 trillion. For most advanced economies, the real level of debt is three to five times their GDP.

United we enter, disunited we emerge. Growth produces a greater synchronization of economies: nations went into recession at more or less the same time. In contrast, recessions generate desynchronization: everybody escapes from the "big black hole" at different speeds. The recovery of Europe is relatively flat, with a growth of about 0.5 percent. The US is recovering faster, at more than 2 percent. Brazil and Russia can expect to achieve 6 percent growth, and a significant number of Asian economies will grow at more than 8 percent.

Even within regions, the differences can be significant: In Europe, Germany could very well grow by 3 percent, outpacing the other large European economies. Countries that show a consistent surplus in their current account balance rise faster, benefited by a regular influx of fresh revenue from abroad.

Finally, every recession is followed by a jobless recovery. Unemployment in the US remains high at 9.5 percent and in Europe it is close to 9 percent. Youth unemployment is particularly worrying: 18 percent in the US, 20 percent in Europe and an alarming 42 percent in Spain.