New Delhi: As 2010 draws to a close, the health of the global financial system appears to have improved, with the economic clout of emerging nations on the rise even as developed countries continue to grapple with debt woes.
Ushering in the New Year, the global economy seems to be in the middle of the worlds of austerity and stimulus.
In signs of improvement, the world economy is estimated to have expanded by around 5% this year, in sharp contrast to the lower output witnessed in 2009.
On either side of the Atlantic, the efforts to contain fiscal deficit and bolster economic growth have been in different trajectories. While crisis-hit Europe is clamouring for severe tightening measures, the United States continues to print more dollars.
“Uncertainty and struggling to regain itself in the aftermath of the global economic slowdown has been the hallmark of most economies during 2010,” global consultancy firm Deloitte India’s Principal Economist Shanto Ghosh told PTI.
In the wake of the ravaging crisis, power has shifted from the once-unshakable developed world to rapidly growing nations such as India and China.
In a testimony to their rising economic clout, India and China are all set to get more voting power at the International Monetary Fund (IMF). The G-20 grouping has emerged as the most influential voice, with increased focus on nations such as India and China, whose consuming power is leading the global recovery.
Meanwhile, the word ‘stimulus´ continues to remain the buzzword for the world’s largest economy, the US. Apart from continuing with a near-zero interest rate regime for three years, the US is now exploring newer ways to boost the still-sluggish recovery.
Federal Reserve chief Ben Bernanke has hinted at further quantitative easing measures, after unveiling a plan to buy $600 billion-worth of government securities. What is more, President Barack Obama has announced fresh tax cuts and earlier this year, initiated steps to discourage outsourcing.
The justification for these steps, and more, lies in numbers. The US economy, which expanded by 2.5% in the September quarter, is threatened by a high jobless rate. The jobless rate in the US stood at 9.8% in November.
With Uncle Sam pumping in more dollars to rejuvenate the over $14 trillion economy and create more jobs, the spillovers are nightmarish. The cheap dollar has fuelled excessive fund flows into emerging nations, including India and China, which in turn has stoked concerns of overheating and asset bubbles.
In terms of currencies, both China and the US are attracting criticism for the relatively low value of their respective currencies.
Furthermore, the euro -- the common currency binding 16 European nations -- is even blamed for limited choices in tackling the debt turmoil faced by countries such as Greece and Ireland.
Surviving on multi-billion dollar bailout packages extended by the European Union and the IMF, euro zone members Greece and Ireland can only opt for austerity, as they are tied down by the common currency.
Many experts even believe that the euro is not the right answer for weak and not-so-prosperous European nations. Greece was assured of a bailout package of 110 billion euros, while Ireland’s is pegged at 85 billion euros.
Moreover, the vastly different economic scenes in the US, Europe and emerging Asian nations has made the task of concluding the stalled-WTO negotiations more difficult. Opening up their respective markets under the World Trade Organisation norms is not an encouraging proposition for many developed nations.
On the global banking front, countries have woken up to the necessity of having sound regulations, as reflected in the proposed Basel III norms, which require lenders to keep more money in reserves.
“India and China are well-poised to benefit in the short run from their relatively better growth prospects.
“However, this will also increase the downside risk of a slowdown in these economies when capital reverses its flows from these countries as the rest of the world recovers,” Shanto Ghosh said.