The Years Ahead
Insurance Experts' Forum, August 26, 2010
It’s been a while since my May 2009 post, titled: The Consequences of Printing Money. What has changed since end of May 2009? Let’s try to review the two main ingredients that are influencing our economy:
1. Government debts are increasing. Based in Switzerland—in the heart of Europe (geographically, I mean, since Switzerland is neither part of the European Union nor the Euro zone)——I was in the first row to follow the Greek crisis. The lack of fiscal discipline and the absence of economic growth in Greece have contributed to put pressure on the Euro zone, but eventually a new bail-out plan (at least a guarantee to launch one if needed) has been decided with the agreement of the German government. This test has demonstrated that the Euro currency system works well in good times, but represents a weakness for Euro zone countries when some of their members are in a difficult financial situation as it is the case now not only for Greece, but also for Spain, Portugal and some others.
2. Stimulus packages have still to prove they work. The U.S. counts on stimulus packages to boost its economy. Many policymakers thought the stimulus package decision following the 2008 financial crisis would help the U.S. economy to quickly return to growth, which it temporarily did, but it appears now that the overall economic situation in the U.S. is deteriorating again.
If we look at the industrialized world right now we can make the following statements:
• European countries (at least the majority of them) and the U.S. have serious concerns with relation to their debt level. Some European countries have decided to cut public spending like the UK, Greece and Spain. So far, there is not a clear trend to implement massive tax increase.
• The U.S. still continues its Quantitative Easing (QE) strategy. The Fed purchases the U.S. government debt contributing to printing more money. Right now it seems that the debt level is not a priority for the U.S. government.
This situation leads me to ask more important questions for the future: If there is no or very slow growth for a while, how will governments improve their financial situation without increasing taxes? If they increase taxes, will it contribute to kill any potential economic growth, which already is predicted to be anemic? Is it possible we’ll see a major government fail in the next five years?
Government bail-outs of financial institutions have not solved the problem, but have simply allowed them to gain more time. However, we should bear in mind that while governments can print money, they cannot print jobs. There might be a no-exit path here unless governments address the chronic deficit and debt problems and, together, agree to restructure the international monetary system.
This blog has been reprinted with permission from Celent.
Nicolas Michellod is a senior analyst in Celent's insurance practice, and can be reached at email@example.com.
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