Completion of a last-grasp deal in the US to avoid an American default has failed to bring any relief, as investors are riveted on the implication on how tighter fiscal policy could constrict US growth and Europe’s debt crisis continues worsening.
Washington’s efforts to cut spending will slow growth at a time when global factory output is already stagnating. Despite maintaining AAA rating overall, the dollar and the US has lost its credibility to global investors, forcing them to look elsewhere. This has added pressure to both the Yen and the Swiss franc, with interest rates increasing due to their reputation as safe-haven currencies. Fiscal leaders have been forced to maintain rigorous watch and skepticism to ensure their currencies do not become inflated, nor become another bubble to later burst. Evidence of these implications is seen by the Swiss National Bank trimming its key three-month Libor rate target to as close to zero as possible. This led to the franc falling from records high against both the dollar and the euro, though this may be a fleeting occurrence as there is no shortage of investors searching for the safe-haven currency.
“The whole of Europe is in a very dangerous situation” – Jyrki Katainen, Finnish Prime Minister
As investors outsource to the franc and the Yen, the outlook for Southern Europe continues to degrade. The situation in both Italy and Spain has not helped alleviate the pressure from EU leaders. Yields on both the Spanish and Italian bonds have hit Euro-era record highs this week. Many analysts see a bond yield above 6% as unsustainable, which is cause for deep concern for Italy, whose bonds yield at 6.2227% , and Spanish bonds at 6.14%. The attempted solution in the past for Greece, Portugal, and the Irish Republic were to, essentially, throw money at the countries in the form of relief packages. Consequently, this has not functioned as well as thought, as Greece has required this action twice and Portugal and Greece are still on the decline. To make matters worse, Italy is the Euro-zone 3rd largest economy, twice the size of all three previous countries combined, and would therefore a bailout would be not be affordable. Moreover, Italy is a major source for imports and trade, and the EU’s inability to control Italy’s debt-to-GDP ratio, now as high as 120%, does not bode well for the future of the EU. Matters will only continue to get worse and with the EU straining under current pressure, what light is there in the future to which the EU could possibly look towards?
Domestic efforts have been taken by both Spain and Italy to help curb the debt, as well as ease the strain their problems will put upon the rest of the European nation. Mr. Berlusconi’s government is trying to implement a 43bn-euro austerity package but efforts in July were slighted by reports outside of Italy that Berlusconi would be unable to enforce the needed spending cuts. Nevertheless, the EU has maintained a rigorous process of persistence and force towards the surmounting problems and it may prove successful on the long run. Contrasting to the US, European leaders have maintained rigorous negotiations and across border collaboration to help relieve the ailing community. Though spending cuts and the tightening of monetary control may result in immediate problems during a global period of stagnation, the future outlook may be more promising and provide the necessary motivation to work through the current hardships.
Sadly, with global markets falling due to global stagnation and international tightening of budgets, patience and cooperation will be in short supply. Asian markets fell more than 2%, Nikkei was down 2.2% and MSCI Asia ex-Japan was down 2.4%. This coincides with the decline of US markets, wish Nasdaq down 2.1%, DJI down 1.67#, and S&P 500 down 2%. More startling is the repeated falling of the stock market these past 7 days, which has brought S&P 500 into a negative spectrum as its losses outweigh its gains throughout the year. Furthermore, the Institute for Supply Management, the world’s largest supply of management association, reported its services index falling to 52.7, the lowest since February 2010, seriously marking the global disintegration of financial security.
So saying, global security has been rooted in the interconnected state in which the financial security of the world has been based upon these past decades, but with the slip of one nation, more so have followed, marking the domino theory that was suggested in the previous post on global integration: Global Integration. In order to stop the cascading state of the global economy, there must be a break in the system, a block to impede to growing state of alarm, which insinuates that the global community must come together to work against the growing stream of events, and stem the tide.