Fifteen years after the collapse of the US investment bank Lehman Brothers triggered a devastating global financial crisis, the banking system is in trouble again. Central bankers and financial regulators each seem to bear some of the blame for the recent tumult, but there is significant disagreement over how much – and what, if anything, can be done to avoid a deeper crisis.
MILAN – The global economy’s most striking feature nowadays is the magnitude and interconnectedness of the macro risks that it faces. The post-crisis period has produced a multi-speed world, as the major advanced economies – with the notable exception of Germany – struggle with low growth and high unemployment, while the main emerging-market economies (Brazil, China, India, Indonesia, and Russia) have restored growth to pre-crisis levels.
This divergence is mirrored in public finances. Emerging economies’ debt-to-GDP ratios are trending down toward 40%, while those of advanced economies are trending up toward 100%, on average. Neither Europe nor the United States has put in place credible medium-term plans to stabilize their fiscal positions. The volatility of the euro-dollar exchange rate reflects the uncertainty about which side of the Atlantic faces higher risks.
In Europe, this has led to several ratings downgrades of the sovereign debt of the most distressed countries, accompanied by bouts of contagion spilling over to the euro. More seem likely.
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