Multilateral liberalization has often been described as a bicycle that has to keep moving to maintain stability. Undeniably, the bicycle has come to a standstill: as the Doha Round drags on since 2001 with little result, countries have worked off their liberalization commitments from the Uruguay Round (1986-94) and face few incentives to reform their policies in preparation of new WTO obligations.
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The European Commission has just released gloomy, updated macroeconomic forecasts, with Euro area GDP now projected to decline by 1.9% in 2009. In eleven out of 16 Member states, GDP is expected to fall in 2009, with an especially sharp decline in Ireland (-5%). Due to automatic stabilizers and fiscal stimulation plans, half of the countries are expected to run fiscal deficits exceeding the 3%-of-GDP red line. The European Commission forecasts very large deficits in Ireland (11% of GDP) and in Spain (6.2%). Strikingly, these two countries used to be part of the most virtuous members of the Euro area until 2007. Indeed, from 1999 to 2007, none of these two reached or even approached the 3% bound. General government budget was close to balance on average in Spain while Ireland ran a 1.6% surplus on average. All other Euro Members except Belgium, Finland and Luxembourg crossed the red line at least once, and five of them (France, Germany, Greece, Italy, Portugal) did it several times.
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After seven years of negotiations, the World Trade Organization (WTO) mini-ministerial meeting held in Geneva last July did not manage to close the gap between delegations to reach a final agreement on the Doha round liberalization modalities. Conflicts still exist on several issues regarding the disciplines that both developed and developing countries should make. Traditional impact studies aim to assess the potential gains of Doha negotiations by comparing the consequences of the negotiation modalities to the status quo (baseline). Therefore, the cost of a failure of the negotiations is just an opportunity cost: the unrealized gains. However, this approach may underestimate the real losses associated with a failure of the DDA. Such a drastic event will make the business as usual assumption uncertain: the status quo is not a long-term perspective for trade policies.
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The Washington meeting of the Heads of State to take place shortly reflects recognition of the need for international cooperation in the regulation of financial institutions and markets. There has been international cooperation in recent months, mainly among the major central banks, notably the coordinated interest-rate cuts that took place recently, and the provision of dollar financing by the Federal Reserve to the European Central Bank, which needed dollars to relend to European banks that could not obtain them commercially.
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We are entering in different phase in stock market weakness, one that gives me some cause for optimism. I believe that in recent weeks what we have witnessed is a transition from “liquidity fear” to “recession fear” or for the more technical, from liquidity risk to credit risk. It may be hard to notice the difference. Both forces are bad for stock markets in general. But they have a different impact on individual stocks and therein lies the opportunity for opportunistic investors who don’t mind a bare-knuckle ride in search of superior returns.
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Everyday, as a matter of urgency, central banks and governments are fighting against the fire. An amazing blow to confidence has burst within the most sophisticated financial system which has ever been experienced. Before smoke and dust fall down, it is wise to investigate the ways out on which governments should drive the players of this drama in order to contain damages and speed up reconstruction.
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The 1980s have seen the 2nd wave of economic globalization of modern history. It should not end like the first during the 19th century. Economic crises and wars often keep pace. The first energy shock of 1973, the start of the economic reforms in China at the end of the 1970s then in India and finally the fall of the Berlin Wall in 1989, gradually led to a huge transformation of the world economy. The idea to gather a G7 or even the G8 under the current format is clearly unsuitable when we see clouds accumulating on emerging countries, China and India included.
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