Project Syndicate.
NEW YORK – Dark, lowering financial and economic clouds are, it seems,
rolling in from every direction: the eurozone, the United States, China,
and elsewhere. Indeed, the global economy in 2013 could be a very
difficult environment in which to find shelter.
For starters, the
eurozone crisis is worsening, as the euro remains too strong,
front-loaded fiscal austerity deepens recession in many member
countries, and a credit crunch in the periphery and high oil prices
undermine prospects of recovery. The eurozone banking system is becoming
balkanized, as cross-border and interbank credit lines are cut off, and
capital flight could turn into a full run on periphery banks if, as is
likely, Greece stages a disorderly euro exit in the next few months.
Moreover, fiscal and
sovereign-debt strains are becoming worse as interest-rate spreads for
Spain and Italy have returned to their unsustainable peak levels.
Indeed, the eurozone may require not just an international bailout of
banks (as recently in Spain), but also a full sovereign bailout at a
time when eurozone and international firewalls are insufficient to the
task of backstopping both Spain and Italy. As a result, disorderly
breakup of the eurozone remains possible.
Farther
to the west, US economic performance is weakening, with first-quarter
growth a miserly 1.9% – well below potential. And job creation faltered
in April and May, so the US may reach stall speed by year end. Worse,
the risk of a double-dip recession next year is rising: even if what
looks like a looming US fiscal cliff turns out to be only a smaller
source of drag, the likely increase in some taxes and reduction of some
transfer payments will reduce growth in disposable income and
consumption.
