August 9, 2020

Double Trouble

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Two things are giving everyone cause for concern at the moment: the euro crisis and the state of the US economy. A good discussion of the ongoing euro crisis and its potential disastrous impact can be found here on Paul Krugman’s New York Times blog, and an article about the US economy from the eyes of Ben Bernanke, Federal Reserve Chairman, can be found here.

While there has been some respite for Europe in the form of various European governments approving the expanded bail-out fund for struggling Eurozone members, the core problem facing the world economy still exists: the foundations of the single currency and banking system are looking very shaky indeed. Add to this the fact that the US economy is sluggish and we have a very poor economic outlook in the medium-term.

It does not help that politicians are not rising to the challenge. There is no strong leadership on a global (or even a European) approach to the crisis. In Europe Angela Merkel and Nicholas Sarkozy are both having to deal with discontented electorates at home who do not want to foot the bill for another country’s profligacy. In the US, President Obama is weakened by partisan politics in Congress and has to stand by and watch as the US economy stagnates.

In terms of your Economics course, consider what all of the above is doing to expectations and the effect this will have on the European and US economies. Consumption will be reduced as individuals try to save more of their income and incomes will be reduced as unemployment rises, private investment will be severely impacted as businesses forecast poor returns on investment and the MEI shifts further to the left, and exports will be dampened as all economies suffer similar fates at the same time.

It is not clear what will happen in the economy in the next few weeks but it is likely to be painful. I suspect this will not be the last post about the problems in the global economy…