Who is to pay the dearest price in a global slowdown?

European Parliament. Workshop on granting Market Economy status for China after 2016. Discussion between Bernard O’Connor, Professor at Bocconi University, Jean-François Bellis, Professor at the Institute of European Studies of the University of Brussels, Lucien Cernat, Chief Trade Economist of the European Commission, Robert Scott, Director of Trade and Manufacturing Policy Research at the EPI Institute and author of the Study ” Unilateral grant of market economy status to China would put millions of EU jobs at risk”, Maurizio Zanardi, Associate Professor in Economics at the Lancaster University Management School and Schaake Marietje (ALDE, NL).
Event Date: 28/01/2016. City: Brussels. © European Union 2016 – Source : EP.

What happens in China is more important for the European economy than a meagre fall of unemployment in the Eurozone. Last Tuesday, China said its February exports dived by a record 25.4%, fuelling new fears for a bigger slowdown in the world economy. At the same time, a Press release by Eurostat, the EU statistical service announcing a small reduction of unemployment, by some decimals of a percentage unit in the Eurozone, was not enough to arrest a fall in Europe’s capital markets. Everybody has in mind that euro area unemployment always remains well into the double digit region.

There are more problems in Europe though, like the non performing loans of every kind and the inability of the economy to take advantage of the European Central Bank’s abundant and almost zero cost liquidity treatment. Unfortunately, it’s just the banks that profit from this money bonanza. Turning now to the other developed economies, we find that they are not in a much better position.

Japan in a shoddier position

In Japan the economy is also not reacting to a similar liquidity treatment after years of Abenomics. The Prime Minister of this country, Shinzō Abe who pressed the Bank of Japan, the country’s central bank to introduce a huge quantitative easing program in order to revive the economy, seems now to have lost control. Deflation and recession again show their ugly face. Most economic analysts consider now the Abenomics plan as a complete failure. As for the United States, the country’s stock exchanges are going up and down according to the good or bad news about the Chinese growth rate and export performance. Let’s dig a bit into all that.

Last Tuesday, it became known that the Chinese exports fell abruptly in February by a huge and alarming percentage. Analysts had expected a fall, due to seasonal adjustments, but nobody had predicted a decline larger than 12.5%. Nonetheless, China is a key economy, the second largest of the world, not only as a producer but as a consumer as well. On the same occasion, it was released that the Chinese imports fell in February by 13.8 percent. There is more to it though. This was the sixteenth month in a row that the Chinese imports are falling. And this is an equally alarming development. If China continues slowing down that fast, the rest of the world will be gasping for air.

Breathing with China

Last Tuesday, the paramount global weight of the Chinese economic variables instantly affected the entire world. All major capital and commodity markets, including oil, fell to lower levels. Obviously, investors instantly adjusted their expectations about the growth of the global economy. This adjustment though, revealed also what the markets believe about each one of the major economies. The New York stock exchange main index, the Dow Jones Industrial fell slightly by less than half a percentage unit. In Europe the capital markets lost a full percentage unit and the Tokyo stock exchange main index, the Nikkei fell by one and a half percentage unit.

After Tuesday all those markets followed diverging courses, due to other developments more particular to any one of those exchanges. However, on Tuesday we got a clear snapshot of what investors believe about the resilience of the developed economies, in view to a possibly steeper global slowdown. Obviously, the most resilient one appears to be the American economy. The more drastic and effective response of the US authorities to the 2008-2010 financial crisis has obviously paid good dividends.

Who can better resist?

Unquestionably, the American economy and more particularly the country’s financial system is in a much better position than the Eurozone. The US may suffer from a chronic dual deficit in the government budget and its foreign trade, but the strength of the dollar can cover those gaps for a long period of time.

As a result, the American policy makers can plan for long periods without the constraints of the double deficit. Of course, this is a unique case in the history of economics. Not to forget that the strength of the American dollar is actually based on the political and military might of the US and on their proper oil reserves plus those of the Gulf Kingdoms. Whichever oil producing country decides to sell oil in any currency other that the dollar, it has a rough time. Iraq, Libya and Venezuela paid the price. In this way the US central bank, the Fed, didn’t hesitate and has fed the American economy with $4.5 trillion freshly printed dollars, effectively helping the financial system and the country to overcome the 2008 crisis.

Europe is different

On this shore of the Atlantic Ocean though, the Eurozone doesn’t have this luxury. The euro has to be supported by a positive foreign account and much lower levels of government deficits. That’s why the EU is recovering more painstakingly from the crisis than the US. For the same reason, Eurozone appears less crackproof to a possible new global slow down.

Consequently, an export performance problem like the Chinese one, stemming from a global slowdown would compromise the European economy to a much larger degree than the US. China itself will be less hit than the West from a general slowdown of exports, because it can count now more on a gigantic internal demand. As for Japan, it seems that she will pay the dearest price of them all, the internal demand has never been its strong point.