Following the 2007-2008 financial crisis in the United States, the global economy has suffered a lingering credit crisis. The impact of the destruction of trillions of dollars in global wealth has shaken financial institutions and governments. The cascade from the financial crisis on European economies was immediate, but not realized until 2010 when European banks began to struggle under the weight of their own property investment excesses. Unfortunately, their banks were too big to fail, and also too big to bailout, especially in the Eurozone periphery. The weight of the failing banks is destroying the public finances of these countries as the investment excesses of a few are effectively nationalized under undemocratic anti-progressive terms.
This essentially takes us to today, June 2012. The Eurozone is fracturing as debt-burdened periphery countries (Ireland, Greece, Portugal, Spain) are relying more and more on the core (Germany, France) to keep their banks and governments afloat. Greece has already accepted a government bailout under the most draconian of terms, Spain required €100 billion to keep its banks capitalized and will likely need a national bailout as well. Nouriel Roubini's "slow motion train wreck".
The Euro Crisis is extremely dangerous to the world economy as Europe is a lynchpin in global credit markets. Eventually "too big to bailout" will mean something and the ripples through the EU, and the global economy would likely perpetuate a recession worse than 2008-2009.
The EU is easily China's largest trading partner. Chinese exports to the EU were $356 billion ($324 billion to the US) in 2011. Imports from the EU at $211 billion almost double the US. This means that EU troubles are Chinese troubles and Chinese troubles affect global commodity prices and have spill over to Japan, Indonesia, South Korea, Brazil and Australia. This will also create conditions for a likely US recession.
All of this financial turbulence will lead to greater instability around the world. As the primary exporter of natural gas to Europe, Russia will face a dangerous situation of lower medium-term commodity prices. Already facing political challenges, Vladimir Putin, Russia's president/prime minister, will likely see that challenge increase as state coffers struggle to keep job growth. Similar political challenges might face Saudi Arabia, which already had to grant $150 billion in social programs to skirt out out of the Arab Spring. Saudi Arabia will likely survive politically, as they have $500+ billion in currency reserves available to appease the population. Countries like Nigeria, Argentina, Peru and Venezuela all face similar political problems in a low-price energy environment. All of this means greater uncertainty in the world economy that had so much promise at the turn of the new millenium.
In 2014, we are likely to see a world that become more fractured. While the neo-liberal agenda of free trade and globalization will continue, the benefits will be harder to see. City-states like Singapore and Hong Kong are likely to benefit as safe harbors. Fiscal pressures will continue to mount for developed economies as negligible growth will hurt tax revenues and aging populations will increase the burdens on the state. Massive pension and health care funding shortfalls exist in all developed countries and this will exacerbate an already precarious situation. This might even create political tension in the United States as Congress becomes forced to address fiscal challenges in 2013-2014. Although likely to become a beneficiary of a flight to quality, the US cannot continue to run trillion dollar deficits forever, even at 0.5% interest rates. All of this culminates in a very precarious world in 2014 which will likely continue until the end of the decade.
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