Gazelles and Turtles

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The financial crisis is over but the world is currently divided into two groups: those countries that are recovering strongly and those that are lagging behind with new potential problems, writes Hans-Werner Sinn, professor of economics and public finance at the University of Munich and president of the Ifo Institute, in an August op-ed.

This op-ed was authored by Hans-Werner Sinn.

''The world's worst post-war financial crisis is over. It arrived suddenly in 2008, and, after roughly 18 months, vanished almost as quickly as it had come. Bank rescue programmes on the order of €5 trillion and Keynesian stimulus programmes on the order of a further €1 trillion staved off collapse. After falling 0.6% in 2009, world GDP is expected to grow this year by 4.6%, and by 4.3% in 2011, according to International Monetary Fund forecasts – faster than average growth over the last three decades.

The European debt crisis, however, remains, and markets do not fully trust the current calm. The risk premia that financially distressed countries must pay remain high and signal continuing risk.

Greek interest rate premiums relative to Germany on ten-year government bonds stood at 8.6% on 20 August, which is even higher than at the end of April, when Greece became practically insolvent and European Union-wide rescue measures were prepared.

The spreads for Ireland and Portugal have also been rising, even though by the end of July it seemed that the gigantic €920 billion rescue package put together by the EU, the eurozone countries, the IMF and the European Central Bank would calm the markets.

The world is currently divided into two groups of countries: those that are off to a strong recovery, and those that lag behind and are signalling new problems. The BRIC countries – Brazil, Russia, India and China – are in the first group. Even Russia, where the upswing was difficult and hesitant, is expected to grow by 4.3% this year. China remains the champion, with a growth rate around 10%.

The second group consists of countries with debt problems, above all the United States. While the US is expected to grow by 3.3% this year and by 2.9% next year – roughly the long-term average for the past 30 years – this cannot be called a self-sustained upswing, given that the fiscal deficit is expected to reach a breathtaking 11% of GDP this year, before easing to a still-high 8.2% in 2011.

While the US no longer suffers from rising unemployment, the current 9.5% jobless rate is very high for the US, roughly double its level before the recession. The problem remains the real-estate market, whose collapse caused the crisis. The Case-Shiller index for single-family homes seemed to have recovered in spring 2009, after a 34% decline relative to the last boom. But home prices since then have been flat and show no visible trend.''

To read the op-ed in full, please click here.

(Published in partnership with Project Syndicate.)

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