The year 2002 has witnessed an enormous amount of change in the world economy. While euro is fast consolidating its position against its compatriot, the US dollar, Germany is facing stagnation and a major unemployment problem. Argentina is yet to revive from its economic crisis, and Brazil's currency has crashed, making the country vulnerable to economic shocks. But the situation in the US remains completely different. Though the country is facing a mild recession, appropriate economic policies have been initiated to tackle them. Can US sustain its dominant global position?
In the course of the year 2002 an increasing number of indicators suggested that the world economy has entered a new phase and that the new era may be quite different from the exuberant 1990s. Working off the excesses of the 90s may be one of the milder characteristics of the new decade; a more serious expectation would be that the industrialized world as a whole has begun a synchronized downturn and that mutually reinforcing factors make it increasingly difficult to contain the spiral.
While up to now the recessionary tendencies in the United States and Europe have been relatively mild, severe crises have hit some of the emerging economies. The absence of new funding has driven Argentina into default on its internal and external debt and the country has fallen into a veritable depression. Although a likewise disaster was prevented for Brazil, it remains to be seen whether the provision of an emergency credit line of US$30 bn by the International Monetary Fund (IMF) was a good decision. While Brazil could remain solvent, all of its main economic indicators have deteriorated markedly in 2002, making the country increasingly vulnerable to new shocks. Brazil's currency has crashed and because a large part of the internal debt is pegged to the US dollar, the country's debt burden in terms of the domestic currency has exploded. Inflation and unemployment are on the rise, providing the conditions of a vicious circle where a weakening currency drives up the debt and the inflation rate, and both of these then in turn weaken the currency anew. |
