BREAKINGVIEWS - World moves closer to 2008-style cliff

Sat Oct 1, 2011 4:09am IST

A euro sculpture is pictured in front of the headquarter of the European Central Bank (ECB) in Frankfurt, January 15, 2009. REUTERS/Kai Pfaffenbach/Files

A euro sculpture is pictured in front of the headquarter of the European Central Bank (ECB) in Frankfurt, January 15, 2009.

Credit: Reuters/Kai Pfaffenbach/Files

Related Topics

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Edward Hadas

LONDON (Reuters Breakingviews) - What turns a financial mess into a deep recession? The answer to that question is crucial right now. There is a mess in the euro zone and signs that GDP has stopped increasing in much of the world, but neither the markets nor any large economies have fallen off a 2008-style cliff. Not yet, anyway.

Most observers were astounded by the speed and scale of the last collapse -- in just a year industrial production in developed economies fell 17 percent and global trade fell by 20 percent, according to Dutch consultants CPB. The shock of the September 2008 failure of Lehman Brothers massively amplified the fear and credit tightening which were already slowing the global economy. The authorities responded with strong enough countermeasures to prevent a great global depression, but they were not fast enough to stop the economic decline.

The experience has made everyone jitterier. As European politicians bumble and investors' confidence crumbles, talk of a Lehman moment in the euro zone gets louder. At some volume, the worries can become severe enough to be self-fulfilling, precipitating a crisis.

But there are good reasons to hope that the global economic fabric will not be torn. To start, the euro zone as a whole has nothing like the U.S. housing credit bubble and the profligate governments in the currency bloc are all moving in the right direction. Also, some lessons have been learned -- the financial world has been preparing for substantial writedowns on Greek debts for more than a year.

But these bulwarks might not be strong enough to resist a Lehman-like unexpected calamity. The most obvious risk is that euro zone politicians live down to their worst instincts, but there are many financial imbalances around the world. If something explodes, panic could spread to businesses and ordinary people.

Everyone should hope that does not happen. After Lehman, the world's authorities could offer effective relief. But now policy rates can no longer be cut and more stimulus, either monetary or fiscal, would be as likely to increase panic as to calm nerves.

CONTEXT NEWS

-- The European Commission index of economic sentiment in the euro zone fell from August to September from 98.4 to 95, the lowest level since late 2009. The indicator is only above its long term average in one country, Germany.

(Editing by Hugo Dixon and David Evans)

FILED UNDER:

Reforms Push

REUTERS SHOWCASE

Reuters Exclusive

Reuters Exclusive

India looks to sway Americans with nuclear power insurance plan  Full Article 

To Boost Growth

To Boost Growth

Crank up public spending to revive growth - chief economic adviser.   Full Article 

Bold Steps

Bold Steps

SpiceJet rescue plan marks bold bet on Indian aviation recovery.   Full Article 

New Airline

New Airline

Tata, Singapore Air venture Vistara to take off on Jan 9.  Full Article 

Online Sales

Online Sales

Knock knock. Who's there? Amazon's best-selling holiday author.  Full Article 

26/11 Plotter

26/11 Plotter

Pakistan to challenge bail for Mumbai attack "mastermind".  Full Article 

Chinese Economy

Chinese Economy

China revises up size of 2013 economy, sees no effect on 2014 growth.  Full Article 

Reuters Poll

Reuters Poll

BSE Sensex to hit 32,980 by December 2015  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage