Financial crisis and globalization
"The global economic slowdown is starting to move beyond the major financial markets - and impact on real jobs. Unemployment figures released in the UK this week show that just over 1.8 million people are now out of work, 140,000 more than three months ago. The picture is similar elsewhere, with unemployment figures in the US also making for grim reading, coupled with news that Germany - the world's biggest exporter - is officially in recession. The slowdown impacts everywhere because of the connected nature of the world's economy" (source: bbc.co.uk – 13 November 2008).
"The global economic crisis is expected to lead to painful cuts in the wages of millions of workers worldwide in the coming year. For the world’s 1.5 billion wage-earners, difficult times lie ahead", says ILO Director-General Juan Somavia. "Slow or negative economic growth, combined with highly volatile food and energy prices, will erode the real wages of many workers, particularly the low-wage and poorer households. The middle classes will also be seriously affected" (source: ILO Global Wage Report 2008/9).
In this context, it would be difficult to deny that the world is facing hard times today, or attribute it media exaggeration.
In his presentation on 25 November held at the International Training Centre of the ILO, Professor Deaglio analyzed the current situation starting from a microeconomic point of view. He illustrated how the "disease" was actually triggered by the crisis of the so-called "sub-prime lending" in the USA. Financial products of this type differ greatly from the traditional system of loans.
Professor Deaglio identified a number of "waves" that characterize the current financial crisis:
- the "financial infection" that has affected structured banking products and has led to heavy losses for banks and other financial institutions;
- the reciprocal mistrust among banks which has prevented interbank financial markets from functioning correctly and caused a decrease in overall banking transactions;
- the generalized fall in real estate prices in the US and the consequent heavy losses suffered by banks and other financial actors.
Due to a sort of domino effect, caused by the interaction of each wave, the epidemic has spread within the US and even beyond its borders. The key factors identified by Professor Deaglio as being at the heart of the crisis include: the short-sighted strategies of both companies and the financial sector; the lack of transparency and effective regulation of major financial markets; and the particular emphasis the media has dedicated to this crisis.
According to Professor Deaglio, from a macroeconomic stand, the impact of the financial crisis has brought about a fall in purchasing of consumer products and in the construction industry, so the US economy has ground to a halt. As a consequence, there has also been a downturn in trading on the world stock exchanges and in exports to the US. This situation has caused a stand-still in the world economy.
Some emergency remedies have been applied: cash has been injected into the system’s weak spots; money market rates have been lowered; and Central Banks might take over "bad banks". In addition, some other long-term interventions need to be foreseen, such as: introducing better transparency and accounting rules; coordinating the activities of Governments and Central banks at global level; and creating ad hoc institutions to re-organize the financial-banking system.
Will all this work? The scenarios before us range from the catastrophic to the more optimistic. "Let us hope that there will not be a "financial catastrophe" due to the credit card system collapse" says Professor Deaglio. "Will this situation turn out to be the end of the US financial supremacy – he continued - and cause the fragmentation of the world economy? Or will there be a "quick fix" thanks to government interventions, together with the reform of international institutions such as the International Monetary Fund and the World Bank? These are some of the dilemmas on the desk of the US President-Elect".
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*The Centre’s Programme of Postgraduate Courses is conducted in collaboration with the University of Turin and other prestigious academic institutions, such as the Université Paris I Sorbonne. The Centre’s postgraduate courses benefit from the scientific partnership of UN agencies such as UNESCO and WIPO and are supported by the Italian Ministry of Foreign Affairs, the Piedmont Region, the Province of Turin, the Municipality of Turin, the Compagnia di San Paolo and the Fondazione CRT.
**Mario Deaglio is considered one of the major Italian experts in economics. He has pursued two career paths, in the academic field and in the area of financial journalism. He is professor of International Economics at the University of Turin. His scientific research mainly focuses on modern western economies, with a special interest for subject matters such as income distribution, "hidden" economies, savings and the so-called "economic long cycles". He is currently concentrating on issues related to globalization. He collaborates with several newspapers and magazines, including The Economist, Panorama and Il Secolo XIX. From 1980-83 he was the Director of Il Sole 24 Ore, the most reputable Italian financial daily. He is currently a much appreciated columnist of the national newspaper La Stampa. Professor Deaglio is author and co-author of books, research studies, monographs and scientific articles.