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Global economies must brace for continuing tough times as governments adjust

By       Message Eric Margolis     Permalink
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World leaders seem to spend much of their time these days jetting from one conference to another. Russia's Vladimir Putin and Iran's Mahmoud Ahmadinejad just arrived here for a summit with Turkey's increasingly influential prime minister, Recep Tayyip Erdogan.

Turkey is rapidly emerging as an important regional political and economic power. Ankara no longer automatically follows Washington's direction, as it did in the past. Erdogan's opposition to Israel's blockade of Gaza and his refusal to isolate neighbouring Iran has made him a hero across the Muslim world.

Turkey's long isolation under military rule from the rest of the Muslim world has ended. Istanbul is returning to its former role as the Paris of the Muslim world.

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This boisterous, fascinating, magical metropolis pulsates with intellectual energy, exciting films and music, and superb food. Western ways are in constant clash with traditional Islamic culture. I spent an afternoon at the military museum, studying the epic of the greater Turkish nation, whose peoples extend from the Great Wall of China to Europe.

The most important issue facing Turkey and the rest of Europe today is not the Mideast but the financial storm raging around the continent. Turkey is so far weathering the tempest fairly well, in part because it was not integrated into the global financial system. But many other European nations are in real trouble.

Hungary, Latvia, Romania are in financial turmoil. Greece is racked by riots, protests and strikes by angry civil servants. There is no way Greece will be able to reduce its unsustainable debt load from 13.3% of GDP to 3%, as Athens promises.

Greece will likely default on its bonds over coming years, just like debt-strapped Argentina. It's hellishly difficult for democratic governments to massively slash public spending, raise taxes and purge bloated bureaucracies.

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The only way out for Greece is to default, withdraw from the euro zone and bring back its wobbly drachma.

There is some good news from Europe. Germany's economy is picking up speed, aided by the weak euro. Britain's new government is about to attack the monstrous debt left by Labour, equal to 12.9% of GDP. Spain is slashing spending.

Members of the European Union have realized they must shrink their debts and construct a central financial authority with enforcement powers. They face war with their powerful public sector unions, particularly in France.

I just attended a conference in Switzerland that featured noted economist Nouriel Roubini, who predicted the American crash of 2008. Nicknamed "Dr. Death," he warns of grim economic times ahead: Deflation; rising unemployment; increased taxes; overcapacity; and negative growth.

The United States, 25% of the global economy, can't rein in its spending or cut debt. President George W. Bush created the biggest deficit in U.S. peacetime history. Now, President Barack Obama is making matters worse by piling on more unsustainable debt.

Government stimulus efforts were a "waste of money," says Roubini. The only way to escape this debt trap is to make economies more productive and shrink governments. But slashing government spending will depress debt-addicted economies in the short-medium term, making matters worse. Dangerous inflation lies ahead in the long term.

Most alarmingly for resource exporters like Canada and Australia, Roubini warns China has massively overspent on infrastructure, exporting its excess capacity. Beijing has "front-loaded 15 years of capital spending," says Roubini.

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As this column keeps reporting, China has massive over-capacity in industry, producing a huge, dangerous bubble. When it pops, the globe will tremble. China has got to boost domestic consumption, which is now only 36% of GDP versus America's nearly 70%.

Canada, rarely in the news, is being hailed across Europe as a model of debt reduction by slashing public spending from 1994-99. Jean Chretien and Paul Martin are lauded for their wise economic management. Canada ran budget surpluses under the Liberals until 2007. As a result, when the financial tsunami struck in 2008, Canada's healthy economy weathered the storm.

 

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Sun Media Group
Dawn
(Pakistan's leading English language Newspaper)
Gulf Times (Qatar)
Khaleej Times (Dubai)

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