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From the February 2002 issue of World Press Review (VOL. 49, No. 2)

The Global Economy

Cold Winter, Early Spring


Wolfgang Uchatius, Die Zeit (liberal weekly), Hamburg, Germany, Nov. 29, 2001

It’s beginning to look a lot like the 1970s. Recession has staged a comeback, dragging down the world’s major economies simultaneously. Today’s open markets have spurred unprecedented growth while exaggerating the effects of the decline.

It’s getting cold in Germany and throughout the world. The United States, Japan, and Germany have fallen, for the first time since 1974, into a simultaneous recession. The German government, already on the defensive in the budget debate, is worried about the next elections. The economic think tanks are lowering their predictions for growth, and many economists are even forecasting a depression like the one in 1929. In winter, people begin to feel cold, and during recessions they get scared: That’s what studies of previous crises show. Those who remain optimistic and predict an upswing are in the minority.

But this is a minority that may, in the end, turn out to be right. The economic pessimism reflects two serious shocks. The New Economy had scarcely taken off when the dot-coms began to go bankrupt. The Internet economy collapsed. The second shock was Sept. 11. After that, who was willing to say that the economy would not suffer harm? Suddenly, confidence in the world evaporated. Self-respecting economic analysts are now pessimists. Anything else would be old-fashioned. Old-fashioned? Nonsense, say the Cassandras, who believe that economic forecasting has nothing to do with the Zeitgeist and everything to do with numbers. Anyone who believes that the crisis will not be bad had better come up with some good, hard numbers.

Let us look at the facts, then. The reality is that Germany is mired in a recession. The question is, how long will it last? Another piece of the reality is this: According to estimates by Morgan Stanley, the American investment bank, Americans in recent years have accounted, directly or indirectly, for over 40 percent of worldwide economic growth. The boom in the United States, the longest upturn in the past 150 years, has also pushed profits up on the other side of the Atlantic. This means that [German Chancellor] Gerhard Schröder was wrong when he claimed that the German boom in 2000 was a domestic success. And it means that he is now right when he says, in the midst of this recession, that the fate of Germany’s economy depends on the Americans.

More precisely, it depends on American consumers. For months they kept the U.S. economy afloat despite the implosion of the dot-coms. Until Sept. 11. After the attacks, consumer confidence plummeted—and this has become the pessimists’ biggest piece of evidence. Since American investors overinvested in the Internet boom, they now must save. Again, consumers are asked to take up the slack. But the pessimists neglect two American names: CNN and [U.S. Federal Reserve Chairman] Alan Greenspan.

That the terror attacks and then the war in Afghanistan would cripple spending is easy to grasp. Instead of continuing to shop, Americans sat in front of their televisions—this is the “CNN effect,” well known from the Gulf War. Back then, when newscasters gave the all-clear signal, people got up and went out again. The same thing seems to be occurring again. The Taliban have been defeated, the government has cut taxes, and the stock market is rallying. Consumer spending is slowly creeping back up.

Another reason is that stores are offering shoppers interest-free credit—thanks to Alan Greenspan. The head of the Federal Reserve has reduced interest rates to the lowest level since 1961, and the banks are passing on the reductions to their clients. The earlier in a recession that interest rates come down, the better. History says that there is a link between how quickly central banks react and the severity of economic crises. The least-harmful recession in the United States since World War II occurred in 1990-91.

At that time, Greenspan cut interest rates quickly, even before the crisis really began. And he has succeeded in doing so again this time. In January he cut rates—two months before the economy slid into an officially declared recession. So an upturn may well come soon. And such an upturn would be quickly felt in Germany, not just because of rising exports to the United States. The International Monetary Fund has determined that the U.S. economy is even more influential than that. For German corporations, its influence is so dominant that a better economic climate there warms things up here, too. Experts refer to this as the globalization of moods.

Pessimists who would rather look at the numbers here will find that they are not all that bad. It is true that consumption is weak and that capital investments and construction have collapsed. But those numbers measure the past; they merely confirm the known diagnosis of recession. Anyone wishing to know the duration of the illness will have to rely upon other factors. Before Sept. 11, there were already signs pointing to an early recovery by the German economy. The shock of the attacks slowed this down, but the process is still under way. In the meantime, the stock indexes in Germany have rebounded to the levels seen at the end of August. Investors, at least, believe in the upturn.

In addition, corporations here have not invested as wildly as their U.S. counterparts. In the third quarter, they greatly reduced inventories; consequently, they will be producing that much more when demand rises. European central banks, too, have cut interest rates, far more slowly than in the United States, but credit here is cheaper. And if, as the chancellor has asked, firms allow many workers to work shorter hours rather than laying any of them off—so much the better. Consumer spending will rise again at a faster rate if fewer people are laid off.

For further stimulus, perhaps the government ought to follow the U.S. example and cut taxes. That is what many experts have recommended. But they are overlooking the existing stimulus at the gas pumps. World oil prices are now lower than they have been in a long time. Since oil is the fuel that keeps the economy running, both consumers and corporations are saving billions, which they can invest. In the information-age economy, it may sound old-fashioned to be talking about gasoline. But last year’s gas-price hike in Euroland cost the community no less than 1 percent of total economic output. For now, oil will remain cheap—unless war intervenes. History teaches us that a severe recession never occurs when oil prices are falling. Soon the economy will probably be warming up, in the world and in Germany.


 
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