BY ASIM ERDILEK
TODAY'S ZAMAN - The Great Recession is definitely over. The global economy, even the eurozone, is growing again, although at different speeds in different regions.
But the eurozone sovereign debt crisis, with its liquidity and solvency risks, persists and continues to threaten the international financial system, which is still recovering from its own crisis, the worst since the 1930s.
The markets, which had been earlier buoyed by China's assurance that it would not dump its eurozone bonds, ended the week on a downbeat note after Fitch on Friday downgraded by one notch the sovereign rating of Spain, whose banking sector is in deep trouble, from the maximum AAA to AA. Fitch's main reason was that the tough austerity program adopted by the Spanish government last Thursday would severely hurt the growth of the economy, whose unemployment rate is already close to 20 percent. The deepening anxiety among holders of Greek bonds that a restructuring of the Greek debt is becoming increasingly likely, despite repeated denials by eurozone governments, also took its toll on the markets. On top of all that the rising military tensions on the Korean peninsula made investors even more jittery.
Last Wednesday, the Organization for Economic Cooperation and Development (OECD) released its 332-page Economic Outlook, which twice a year surveys the major trends and suggests the economic policies essential for high and sustainable growth in its member countries. It presents the outlook to end-2011 for both OECD member countries, including Turkey, and selected non-OECD countries, covering over 80 percent of the global economy
The OECD report argues that the global economic recovery with subdued inflation, helped by a strong rebound in world trade and improving indices of financial conditions -- which estimate the effects of changes in real interest rates, bond spreads, credit conditions, real exchange rates, etc., on economic activity -- still faces serious risks. These risks stem from not only the persistent and potentially contagious sovereign debt crisis but also the overheating in several emerging market economies, especially in Asia, fueled by surging foreign capital inflows.
The OECD argues persuasively against the naive Keynesian objection that fiscal consolidation would only hurt aggregate demand and lower short-term growth, that it would in fact have positive short and medium-term effects on both the real economy and the financial sector. The OECD stresses the necessity for labor and product market reforms not only to prevent high cyclical unemployment from turning into structural unemployment but also to raise potential output and spur innovation. The OECD also emphasizes the need for an internationally coordinated and comprehensive financial regulatory reform, under the auspices of the G-20, to strengthen global financial stability and prevent regulatory arbitrage. But judging from the current separate efforts of individual nations, such as Germany and the US, to act on their own, the prospects for a global financial reform appear dim.
Although the bulk of the OECD report through its first two chapters is devoted to the analysis of the global and country-specific short-term trends and projections, its last three chapters, titled "Prospects for growth and imbalances beyond the short term," " Return to work after the crisis" and "Counter-cyclical economic policy," adopt a longer-term perspective. The third chapter, an extension of the first two chapters, reaches a sobering conclusion. In it, using the simulations of its Global Economic Model (GEM), which combines short-term Keynesian aggregate demand dynamics with a long-term neo-classical supply side, the OECD develops alternative stylized scenarios out to 2025, based on varying potential output projections. They suggest that in the absence of decisive policies on fiscal consolidation, exchange rate realignments and structural reforms, economic growth would remain mediocre, exacerbated by large fiscal deficits and high unemployment rates, along with persistent global (current account) imbalances, sowing the seeds of a future crisis. That sounds like a call to arms to governments to get their acts together and prove that they have learned from their past mistakes. As the Spanish-American philosopher George Santayana said, "Those who cannot remember the past are condemned to repeat it.