The upheaval in the financial markets has sent shock waves around the globe. Economies in North America, Europe and Asia are closely connected -- for better or for worse. But now the threat of a new protectionism is taking shape.
Editor's Note: This feature is part of a SPIEGEL series that will continue all week on how the economic downturn is affecting people and companies around the world. No other downturn in history has hit as many of the world's economies. The current crisis is hitting migrant laborers in China, automobile workers in Detroit, Russian oligarchs and even strong traditional German firms like the chemical giant BASF.
Shortly before trading ended at noon on New Year's Eve, the brokers on Wall Street paused for a moment to gather on the floor of the New York Stock Exchange and sing a song together -- not unlike sailors singing together on a sinking ship.
"Wait Till the Sun Shines, Nellie," they sang fervently, a romantic ditty about waiting for the clouds to pass and the sun which will inevitably reappear. It has been the anthem of New York traders for the past 70 years or so, and singing it together on the last day of the year has become a tradition and means of mutual encouragement. Since the days of the Great Depression, its lyrics have never been as appropriate as they are today.
The Dow Jones industrial average has lost almost 34 percent of its value within the last 12 months. Within that time period, investors have lost more than $6 trillion (4.4 trillion). "It was a horrible year," says trader Roger Volz. "No one was prepared for the pace of destruction." And yet the New York Stock Exchange got off relatively lightly.
Germany's DAX 30 index declined by more than 40 percent, Tokyo's Nikkei 225 index fell 42 percent, and share prices in Shanghai plunged by 65 percent. Investors in Moscow saw the value of their shares decline by more than 70 percent. The Moscow stock exchange even had to be temporarily closed to prevent it from collapsing altogether.
No trading center has escaped the turbulence, and no one has been untouched by the financial crisis. It is spreading -- from bank to bank, from company to company, from continent to continent -- and fast growing into an event of epochal importance: the first global economic crisis since the Great Depression.
Never before in postwar history has there been an economic slump that has dragged down so many economies at the same time, from the major players of the G-7 to economic midgets, from high-tech economies to developing countries. And all of this at an incomprehensible pace.
Graphic: Performance of key global stock markets in 2008
Since then, the status quo -- the system of cheap money, fast credit and the reckless establishment of debt -- has been steadily unraveling. In an op-ed for Newsweek, Yale professor Jeffrey Garten, wrote that the root of the global problem lies in "the fact that banks lent way too much money to too many people and companies that were not worthy." Since that fateful Sept. 15, the flow of capital has run dry, and financial institutions have fallen into something resembling a stupor.
For years, the financial sector became more and more disconnected from the real economy, developing a life of its own in its quest for higher and higher returns. This led to the development of an economy of borrowers based on a foundation of debt. Nevertheless, it all seemed safe enough, because even risks created opportunities to make money. The system made it possible for people to buy houses and companies, for giant corporate empires to be developed and entire economies paid for.
America is a case in point. The country lived beyond its means for decades. Asia granted the United States almost unlimited credit, and the Americans bought foreign goods in return. It was the deal that fueled the world economy -- Asia produces, America consumes -- and the banks provided the necessary capital. But it was clear that this kind of imbalance could not last forever.
Now US consumers are being forced to re-learn an old virtue: frugality. For now at least, Americans are no longer providing the necessary demand for goods -- and the entire world suffers as a result.
At the same time, the inflated financial industry must shrink and reduce its risks; security suddenly takes precedence over profitability. Money has become a scarce commodity once again, and this can jeopardize the very existence of companies that depend on new loans.
These developments have rolled across the global economy like shock waves. They affect the carmakers in Detroit, where employees are worried about their jobs. They have spread to the city of Guangzhou in southern China, where textile factories are laying off workers by the thousands. And they are hitting Russia's nouveau-riche oligarchs, whose vast empires are in fact built on debt. They even impinge on traditional companies like German chemical giant BASF, whose customers are now buying much smaller quantities of plastic parts and insulation materials.
Dragging Each Other Down
No one can escape the maelstrom. It was an illusion to believe that the world economy was broadened by the rise of China, India and Eastern Europe, and that the risks were more evenly distributed as a result. And the hope that the emerging economies could disengage themselves from the economic slump and grow on their own proved to be deceptive. The world has become multipolar, just as the crisis itself is multipolar.
Nowadays the economies in North America, Europe and Asia are tightly interwoven, and labor is distributed around the world. Sporting goods maker Adidas, for example, develops its shoes in Portland, among other places, its designers work in New York and Tokyo, and its marketing offices are in Amsterdam. The company's products are mostly made in China -- where else? The People's Republic, responsible for 11.8 percent of global exports, has already become the world's second-largest exporter after the European Union, which accounts for 16.8 percent.
The risk of infection is even greater on the financial markets. If homeowners in Miami default on their mortgages, this can end up bankrupting savers in Munich, whose bank may have bought and sold the toxic debt after it was prettily repackaged as securities.
More than ever before, the world economy is proving to share a common fate. Because the individual economies are linked -- for better or for worse -- they tend to drag each other down. But can they also rise up again together?
Graphic: Raw materials prices in 2008
The United States, which has been in a recession for the past year, presumably faces the most difficult path ahead. The optimistic scenarios see the downturn continuing until June. But New York economist Nouriel Roubini takes a significantly more pessimistic view. Even if there is a recovery in 2010 and 2011, the professor told Fortune magazine, the situation will still "feel like a recession."
The crisis affects US citizens in several ways: as homeowners whose properties are worth less and less from one month to the next, as investors whose retirement nest eggs are vanishing, and as workers anxious about keeping their jobs. The unemployment rate has grown by half since April 2007. Without an effective social welfare system, this means a descent into poverty for many.
When things are going badly in the United States, the effects are felt almost immediately by its neighbors to the south. Latin America is suffering greatly from weakening demand for its commodities. From Chilean copper to Argentinean soybeans to Brazilian sugarcane, demand has plunged worldwide and prices have declined across the board. The International Monetary Fund expects growth of only 2.5 percent for Latin America this year, which is almost the equivalent of stagnation. Shortly before Christmas, Brazilian President Luiz Inacio Lula da Silva urged his citizens to consume, and even reduced taxes on new cars as an incentive. But people remained cautious. Italian carmaker Fiat, which has a plant in Brazil, even had to rent space at a decommissioned airport to store its many unsellable cars.
Graphic: Growth forecasts for leading economies
What economists refer to as the "resource curse" or "paradox of plenty" is proving itself to be true once again. The thesis holds that countries with large natural resources are especially vulnerable to downturns, because they rely on their resources while neglecting to develop other sectors.
Former Russian prime minister Yegor Gaidar has been warning of this danger for a long time. In a speech to 800 top executives and politicians two years ago, Gaidar sharply criticized the domestic economy's dependence on oil and gas. No one took him seriously at the time, because no one wanted to spoil the party.
And nowhere was the party quite as intoxicating as in Moscow. Imports of French cognac grew by 650 percent within a decade, and Moscow was expected to become a prominent financial center, a "Manhattan on the Moskva." As recently as last summer, President Dmitry Medvedev praised his country as an "island of stability." And only a few months ago, Russia even overtook Germany as Europe's largest automotive market. Today this seems like news from another era.
The Russian ministry of industry expects auto sales to decline by more than a third this year. Japanese automaker Suzuki has put its plans to build a factory in St. Petersburg on hold. The energy sector has been hardest hit. Gazprom, Russia's massive oil and gas conglomerate, has shrunk to normal proportions. Only recently, management was bragging that Gazprom, worth $1 trillion (764 billion), would soon become the world's most expensive company. Today Gazprom is worth a mere $86 billion ($64 billion).
At stake is the success of "Putinomics," the economic policies of former President Vladimir Putin, who emphasized the importance of major companies as "national champions." The national budget is expected to slide into deficit territory this year, for the first time in 10 years. Unemployment threatens to climb from 6 to 10 percent, with 400,000 people having lost their jobs in November alone. The prosperity of the new middle class, which has just become accustomed to vacationing in places like Thailand and Egypt, is in jeopardy.
According to the Russian public opinion research institute Levada Center, the crisis has already affected one in four Russians in some way -- in the form of job losses, reduced working hours or pay cuts. In light of such figures, former politician Gaidar hopes "the current crisis will bring the government, the elite and citizens to reason."
But whether investors will return in the foreseeable future is another story. They are pulling their funds out of Russia and Brazil, whose currencies are now under enormous devaluation pressure. The Brazilian real has lost almost half of its value against the dollar since August, and the Russian ruble is at its lowest point in five years.
On the one hand, the devaluation of their currencies places a tremendous burden on newly industrialized countries. The less their own currencies are worth, the more crushing are the debts they have incurred in dollars or euros. On the other hand, a weak currency makes their own products more competitive, as they become less expensive on the world market.
A Return to Protectionism
China could also deliberately increase its exports by devaluing the yuan, especially now that the signs of crisis can no longer be overlooked. Exports in November declined by 2.2 percent over the previous year, and workers whose factories are being closed are increasingly taking to the streets. Commerce Minister Chen Deming is still refraining from using the exchange rate instrument, noting that its effectiveness is "limited," given the decline in overseas demand.
The Chinese are putting their trust in conventional tools, for the time being. Beijing has indicated that it plans to spend about $600 billion (444 billion), or about 14 percent of GDP, to stimulate the domestic economy.
Other countries can ill afford economic stimulus programs, and yet they see no other alternative. "In this crisis, doing too little poses a greater threat than doing too much," Larry Summers, a former treasury secretary and current economic advisor to President-elect Barack Obama, wrote in an editorial for The Washington Post.
Obama has promised what will amount to the biggest US government spending program since Franklin D. Roosevelt's New Deal. More than 70 years later, history is about to be made once again, but this time with the "American Recovery and Reinvestment Plan" being developed by Obama's transition team. The next administration hopes to create at least 3 million jobs with the program, many of them in important cutting-edge industries like environmental technology.
The European Union's 200 billion ($270 billion) program seems almost tiny by comparison. EU Commission President Jose Manuel Barroso hopes to "restore citizens' confidence and counter fears of a long and deep recession," as he puts it. He expects member states to take action quickly and stresses that their individual measures "need to be coordinated." But in the end the member states will probably prefer to strike out on their own. All loyalty to Europe aside, each of the 27 heads of state and government wants to save his own country's banks, companies and jobs -- while securing his or her re-election.
French President Nicolas Sarkozy is a perfect example. Sarkozy promised billions to the ailing French automobile industry, and now additional loans and loan guarantees have been promised. The goal is to enable manufacturers to win back market share. But these kinds of measures aimed at protecting the national economy are hardly compatible with the rules of the single European market any more.
The protectionist approach is also expensive. The Irish will likely take out loans this year worth 7 percent of their GDP, while Spain is expected to borrow 5 percent of GDP and Great Britain 8 or 9 percent. Nobody seems to care about the fact that, under the EU's Stability and Growth Pact, a member state's annual budget deficit may not exceed 3 percent of GDP.
Some Brussels economists are sounding a note of caution. According to Klaus Gretschmann, director general for competitiveness in the Council of the European Union, the measures may be "well-intentioned" but they "aren't always well-executed." Gretschmann considers many of the national bailout packages to be poorly conceived, especially those for the financial sector. Without new business models, says Gretschmann, there is a risk that the banks will use the fresh capital to act just as negligently as in the past.
In the end, everyone in Europe is pursuing his own interests. Many find it difficult "to respect the rules," complains European Commissioner for Competition Neelie Kroes. What is missing is a global strategy against a global recession -- and a body with the authority to coordinate a joint approach. Instead, economies are wasting their energies in national contests for the cheapest currency, the lowest interest rates, the most generous financial aid packages. It's a race that nobody can win.
Although the process of globalization is not being reversed, it is slowed down when each country attempts to protect its own market and pass on the negative consequences of the crisis to trading partners, who then follow suit.
Economists refer to this as a beggar-my-neighbor policy. "This could trigger a chain reaction," warned Simon Evenett of the University of St. Gallen, Switzerland, in a recent statement.
An economist specializing in trade, Evenett already sees signs of such a development. For this reason, Evenett warns, economic leaders should strongly combat protectionist tendencies. He believes there is a lot at stake: "This burgeoning protectionism is threatening a quarter of a century of progress in world trade."
JENS GLÜSING, FRANK HORNIG, ALEXANDER JUNG, MATTHIAS SCHEPP, HANS-JÜRGEN SCHLAMP, WIELAND WAGNER
Translated from the German by Christopher Sultan
© DER SPIEGEL 2/2009
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