Economic recovery: Are we there yet?

The financial crisis, which has been tormenting the world for the last six years, does not seem to be loosening its grip as we enter the second quarter of 2013. Whenever hopes for an imminent onset of a recovery are spurred by upbeat data in the US or the EU, they are soon undermined by some sudden downturn, such as the disappointing March US employment numbers, or by another Eurozone country imploding under the weight of debt, such as the recent escalation of the Cyprus crisis.

Even though all of the G7 countries are still struggling with the consequences of the economic meltdown, the Eurozone seems to be the most deeply affected. As soon as one of its distressed members is rescued (in the last moment, usually) by international lenders, another one catches fire or falls into relapse. The US seems to be faring better than the EU, with its GDP back to pre-crisis levels and falling unemployment. Will 2013 further bring out the differences in their paths to recovery?

The world catches the crisis virus

The debt crisis, which at present affects the entire world, originated from excessive investor speculation and the housing bubble in the US which finally burst in 2006. In August 2008 an epidemic of defaults on mortgage loans triggered a crisis severely affecting the mortgage market.

August 9, 2007 is widely considered to be the unofficial anniversary of the onset of the global debt crisis. On that day BNP Paribas blocked access to its three major US subprime mortgage funds, due to a “complete evaporation of liquidity in certain market segments of the US secularization market” as the French bank explained in a press release. The ECB, alarmed by the news, decided to inject 94.8 billion euros into the market to stop the fallout from the US mortgage crisis.

One year later the US investment bank Lehman Brothers filed for bankruptcy - the largest recorded in the history of the country. Other financial institutions came crashing down, including Bear Sterns, Goldman Sachs or US government mortgage corporations such as Fannie Mae and Freddie Mac.

The wave of defaults hugely weighed on the already weakened European financial system, the crisis soon affecting not only financial institutions but entire countries. Greece was the first Eurozone member to ask for an international bailout in May 2010 (granted 110 billion euros). In November of the same year Ireland was forced to follow in its steps (granted 85 billion euros), while Portugal asked for rescue in April 2011 (granted 78 billion euros). Later that year the ECB started purchasing Italian and Spanish debt in order to reassure the markets.

At the beginning of 2012 Greece once again found itself on the verge of default and a second bailout deal (of 130 billion euros) was struck in February. Meanwhile, contagion reached Spain and Italy. In June 2012 the former was forced to ask international lenders for a cash injection (100 billion euros) in order to prop up its banks. The latter avoided such a solution for now but remains immersed in financial uncertainty. Cyprus started signalizing its dire situation in 2012 and joined the bailout countries in March 2013 (10 billion euros).

Over the course of these years the US as well as the EU countries were forced to implement spending cuts and tax rises to fend off the consequences of the debt crisis, while central banks deployed stimulus to prop up the ailing economies. Poverty rates have risen and social discontent intensified.

2013: Recovery or relapse?

Since the beginning of the year various officials have been implying that a recovery is imminent or already underway. The Fed notes a moderate strengthening of the US economy (although “agonizingly slow,” as the Atlanta Fed President Dennis Lockhart said recently), while the ECB President Mario Draghi has been signalizing that a gradual EU recovery should begin in the second half of the year.

But less optimistic voices can also be heard. The International Monetary Fund, which has just cut its global growth outlook for 2013 from 3.5% to 3.3%, warned that “the road to recovery remains bumpy and uneven for advanced economies.” Some economists, such as Nouriel Roubini or Paul Krugman, even contemplate the possibility of a relapse later this year, as they believe that measures taken to halt the crisis have been either inadequate or insufficient.

Should their predictions come true, we could soon witness sovereign defaults of the most distressed countries, riots and a collapse of the euro, while the less affected areas of the world catch the crisis fire. Let’s just hope that the optimists are right.