A Global Perfect Storm

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Dark, loweringfinancial and economic clouds are, it seems, rolling in from every direction:the eurozone, the United States,China,and elsewhere. Indeed, the global economy in 2013 could be a very difficultenvironment in which to find shelter.
For starters, theeurozone crisis is worsening, as the euro remains too strong, front-loaded fiscal austerity deepens recession inmany member countries, and a credit crunchin the periphery and high oil prices undermine prospects of recovery. Theeurozone banking system is becoming balkanized,as cross-border and interbank credit lines are cut off, and capital flightcould turn into a full run on periphery banks if, as is likely, Greece stages adisorderly euro exit in the next few months.
Moreover, fiscal andsovereign-debt strains are becoming worse asinterest-rate spreads for Spain and Italy have returned to theirunsustainable peak levels. Indeed, the eurozone may require not just aninternational bailout of banks (as recently in Spain),but also a full sovereign bailout at a time when eurozone and internationalfirewalls are insufficient to the task of backstoppingboth Spain and Italy.As a result, disorderly breakup of theeurozone remains possible.
Farther to the west, US economicperformance is weakening, with first-quarter growth a miserly 1.9% – well belowpotential. And job creation faltered inApril and May, so the USmay reach stall speed by year end. Worse,the risk of a double-dip recession next year is rising: even if what looks likea looming USfiscal cliff turns out to be only a smaller source of drag, the likely increasein some taxes and reduction of some transfer payments will reduce growth in disposable income and consumption.
Moreover, political gridlock over fiscal adjustment is likely topersist, regardless of whether Barack Obama or Mitt Romney wins November’spresidential election. Thus, new fights on the debt ceiling, risks of a governmentshutdown, and rating downgrades could further depress consumer and businessconfidence, reducing spending and accelerating a flight to safety that would exacerbate the fall in stock markets.
In the east, China,its growth model unsustainable, could be underwaterby 2013, as its investment bust continuesand reforms intended to boost consumption are too little too late. A newChinese leadership must accelerate structural reforms to reduce nationalsavings and increase consumption’s share of GDP; but divisions within theleadership about the pace of reform, together with the likelihood of a bumpy political transition, suggest that reformwill occur at a pace that simply is not fast enough.
The economic slowdownin the US, the eurozone, andChina already implies amassive drag on growth in other emerging markets, owing to their trade andfinancial links with the USand the European Union (that is, no “decoupling”has occurred). At the same time, the lack of structural reforms in emergingmarkets, together with their move towards greater state capitalism, is hampering growth and will reduce their resiliency.
Finally, long-simmering tensions in the Middle East between Israel and the USon one side and Iranon the other on the issue of nuclear proliferationcould reach a boil by 2013. The currentnegotiations are likely to fail, and even tightened sanctions may not stop Iranfrom trying to build nuclear weapons. With the USand Israel unwilling toaccept containment of a nuclear Iranby deterrence, a militaryconfrontation in 2013 would lead to a massive oil price spike and global recession.
These risks arealready exacerbating the economic slowdown: equity markets are falling everywhere, leading to negative wealth effects on consumption and capitalspending. Borrowing costs are rising for highly indebted sovereigns, credit rationing is undermining small and medium-sizecompanies, and falling commodity prices are reducing exporting countries’income. Increasing risk aversion is leadingeconomic agents to adopt a wait-and-see stancethat makes the slowdown partly self-fulfilling.
Compared to2008-2009, when policymakers had ample space to act, monetary and fiscalauthorities are running out of policy bullets(or, more cynically, policy rabbits to pull out oftheir hats). Monetary policy is constrained by the proximity to zerointerest rates and repeated rounds of quantitativeeasing. Indeed, economies and markets no longer face liquidity problems, butrather credit and insolvency crises.Meanwhile, unsustainable budget deficits and public debt in most advancedeconomies have severely limited the scope for further fiscal stimulus.
Using exchange ratesto boost net exports is a zero-sum game at a time when private and public deleveraging is suppressing domestic demand incountries that are running current-account deficits and structural issues arehaving the same effect in surplus countries. After all, a weaker currency andbetter trade balance in some countries necessarily implies a stronger currencyand a weaker trade balance in others.
Meanwhile, theability to backstop, ring-fence, and bail out banks and other financial institutionsis constrained by politics and near-insolvent sovereigns’ inability to absorbadditional losses from their banking systems. As a result, sovereign risk isnow becoming banking risk. Indeed, sovereigns are dumpinga larger fraction of their public debt onto banks’ balance sheet, especially inthe eurozone.
To prevent adisorderly outcome in the eurozone, today’s fiscal austerity should be muchmore gradual, a growth compact shouldcomplement the EU’s new fiscal compact, and a fiscal union with debtmutualization (Eurobonds) should be implemented.  In addition, a fullbanking union, starting with eurozone-wide deposit insurance, should be initiated,and moves toward greater political integration must be considered, even as Greece leavesthe eurozone.
Unfortunately, Germanyresists all of these key policy measures, as it is fixatedon the credit risk to which its taxpayers would be exposed with greatereconomic, fiscal, and banking integration. As a result, the probability of aeurozone disaster is rising.
And, while the cloudover the eurozone may be the largest to burst,it is not the only one threatening the global economy. Batten down the hatches.

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关键词：perfect Global lobal Storm FECT countries direction elsewhere economic recovery

the global economy in 2013 could be a very difficult environment inwhich to find shelter.
For starters, the eurozone crisis is worsening, as the euro remains toostrong, front-loaded fiscal austeritydeepens recession in many member countries, and a credit crunch in the periphery and high oil pricesundermine prospects of recovery。Moreover, fiscal and sovereign-debt strainsare becoming worse as interest-rate spreadsfor Spain and Italyhave returned to their unsustainable peak levels。（EU）
Farther to the west, USeconomic performance is weakening, –well below potential. And job creation falteredin April and May, so the USmay reach stall speed by year end. Worse,the risk of a double-dip recession next year is rising。Moreover, political gridlock overfiscal adjustment is likely to persist，new fights on the debt ceiling, risks of a government shutdown, andrating downgrades could further depress consumer and business confidence。（US）
In the east, China, its growth model unsustainable, could be underwater by 2013, as its investment bust continues and reforms intended to boostconsumption are too little too late（China）
The economic slowdown in the US,the eurozone, and Chinaalready implies a massive drag on growth in other emerging markets, owing totheir trade and financial links with the US and the European Union （emerging market）
Finally, long-simmering tensions inthe Middle East between Israeland the US on one side and Iranon the other on the issue of nuclear proliferationcould reach a boil by 2013（Middle east Iran）

These risks are already exacerbatingthe economic slowdown: equity markets arefalling everywhere, leading to negative wealtheffects on consumption and capital spending. Borrowing costs are risingfor highly indebted sovereigns, credit rationingis undermining small and medium-size companies, and falling commodity pricesare reducing exporting countries’ income. Increasing risk aversion is leading economic agents to adopt a wait-and-see stance that makes the slowdown partly self-fulfilling.Meanwhile, the ability to backstop, ring-fence, and bail out banks and other financialinstitutions is constrained by politics and near-insolvent sovereigns’inability to absorb additional losses from their banking systems. As a result,sovereign risk is now becoming banking risk. Indeed, sovereigns are dumping a larger fraction of their public debtonto banks’ balance sheet, especially in the eurozone.（consequence）

what's worse is no more weapens to tackle the storm.
Compared to 2008-2009, when policymakers had ample space to act,monetary and fiscal authorities are running out of policy bullets (or, more cynically, policy rabbits to pull out of their hats).Monetary policy is constrained by the proximity to zero interest rates andrepeated rounds of quantitative easing.Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises.(NO monetary weapon) Meanwhile,unsustainable budget deficits and public debt in most advanced economies haveseverely limited the scope for further fiscal stimulus.(No fiscal weapon)Using exchange rates to boost net exports is a zero-sum game at a timewhen private and public deleveraging issuppressing domestic demand in countries that are running current-accountdeficits and structural issues are having the same effect in surplus countries( No exchage rate weapon).To prevent a disorderly outcome in the eurozone, today’s fiscalausterity should be much more gradual, a growthcompact should complement the EU’s new fiscal compact, and a fiscalunion with debt mutualization (Eurobonds) should be implemented.  Inaddition, a full banking union, starting with eurozone-wide deposit insurance,should be initiated, and moves toward greater political integration must beconsidered.Unfortunately, Germanyresists all of these key policy measures, as it is fixatedon the credit risk to which its taxpayers would be exposed with greatereconomic, fiscal, and banking integration.(No political Weapon )