History Lessons
24 Oct 2011
At the time of writing, world stock markets have had a particularly volatile week. Significant daily losses have been only partially offset by much smaller gains as the IMF, the World Bank, the European Central Bank or the G20 releases a statement to say that decisive action will be taken to restore stability. We have heard the head of the IMF say that the global economic situation is “entering a dangerous place” and the World Bank president say the world is in a “danger zone”.
Commentators clamour for decisive action to be taken to ward off the threat of another global recession only three years after the last one. To many, of course, the ‘last one’ never felt like it actually finished.
The outlook for the two largest economies in the world, the USA and the European Union (taken as a whole), is undoubtedly worrying and China, now seen as a potential financial saviour of western economies as either lender or investor, will not be immune to the consequences of a west-led recession.
Current market volatility is attributed in no small measure to the debt crisis in Europe, where a solution is made more complex by the existence of monetary union without political union. This is not for the first time. The Latin Monetary Union, formed in 1865, was built around member nations agreeing a common precious metal content in their coinage. The Union had 11 members, including Greece, which was ejected in 1908 for decreasing the amount of gold in its coins. The Union ultimately failed because of political discord in the early 20th century up to the time of the First World War.
Concerns about countries defaulting on debt obligations remain. But countries have defaulted in the past, including (within Europe) France, Germany, Spain, Portugal and Greece. This may not have been the recent past, but less than 20 years ago the world had to confront and deal with debt defaults by Russia and by most of the countries in South America.
So, what is different now and why does the situation appear more threatening? Well, the numbers, even in relative terms, are a lot bigger. However, to a large extent it’s also the price paid for the technology that now allows markets across the world to react instantly – and sometimes, it seems, uncontrollably – to facts, rumours and conjecture. Politicians just can’t compete.
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