The last two years has been the most intense time of global economic hardship since the Great Depression. When Lehman Brothers and Bear Stearns collapsed in the early fall of 2008, there was a period that lasted just a few days, when the global economic system was literally balancing on the precipice of complete failure. Fortunately, Central Bank leaders around the world joined together in an unprecedented movement of decisive action and slashed short-term interest rates to historically low levels. This swift action by financial and governmental world leaders literally saved the economic system.
Then, just a short 6 months later in March of 2009, the global recession began to bottom out. Equity markets began to rally as key economic data releases began to surprise the upside, economic growth began to take off again throughout developed nations, and the global economy continued to recover and move forward, albeit at a very modest pace, until another disaster struck in November of 2009. In late November it became clear that Greece and several other EuroZone countries were in serious danger of defaulting on large amounts of sovereign debt. This fear of default in Greece caused investors to make a run on the Euro. The Euro dropped ferociously from November of 2009 through June of 2010 as forex scalping traders and investors in general questioned the very existence of the EuroZone. During the worst of the Debt Crisis, there was talk that Germany and/or France may leave the EuroZone, or Greece, Spain, and Portugal may be kicked out. No one knew what was going to happen.
Finally in the late spring of 2010, after months of speculation and political bantering, the European Central Bank and the International Monetary Fund joined together and created a bailout fund for struggling EuroZone countries. This effort reassured market participants that there would be no EuroZone member sovereign default, at least in the short term, and the market began to cover its short Euro positions, and the Euro began a strong rally back up. Currently, the Euro has just finished a massive run against the U.S. Dollar in the months of June and July.
Now, two years later, each developed nation is emerging from the recession at a different velocity, which is making for some very interesting economic and political developments around the globe.
The EuroZone
In order for Greece, Portugal, Italy, Ireland, and Spain to receive bailout funds from the ECB and IMF, they have each been required to institute very strict fiscal austerity measures. In other words, the very loose fiscal budgets that have been in place for years in these countries (which are the very root of the Debt Crisis) have had to be modified significantly. These countries have had to initiate huge government spending cuts, which has set off riots and protests in every country. Minimum wages have been lowered, pensions have been cut, jobs have been slashed, and minimum retirement ages have been raised. These are just a few examples of the many cuts these countries have had to make over the last 2 months.
Many economists are concerned that these austerity measures will eventually weigh heavily on the economic recovery in the EuroZone in coming months. The idea is that if austerity measures are introduced when a country is still in a very weak state of recovery, as all these countries are, then the chance of falling back into economic contraction is very strong. Thus, the outlook in EuroZone is bleak.
United States
The U.S. economy appeared to be recovering quite nicely in early 2010. In fact, the Federal Reserve began closed door talks of when to possibly begin tightening monetary policy. These talks have all vanished in the months of June and July. In June, key economic data of the United States began confirming that the U.S. recovery was hitting a major wall. Currently, in early August it is clear that this slow-down is quite serious. The Federal Reserve has announced it will institute another round of quantitative easing in an attempt to stimulate the U.S. economy. The U.S. Dollar has been feeling the effects of these talks in forex trading, as the Dollar has plummeted in value versus the Euro and Pound in June and July.
The scary thing about the current global economic outlook for 2010 is that no one knows for sure what is going to happen. Two years after the Crisis erupted, experts are still very uncertain concerning the economic future of developed nations. In fact, Chairman Bernanke testified before Congress at the end of July, and in his testimony he declared the outlook for the U.S. economy is “unusually uncertain.” Unfortunately, it doesn’t seem that the history of the 2008 Credit Crisis has been fully written quite yet.