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A Post-Crisis World of Risk

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.

As for the US, Moody’s recently issued a warning on the country’s sovereign debt in the face of uncertainty about Congress’s willingness to raise the debt ceiling amid highly partisan debate about the deficit. Both issues – the debt ceiling and a credible deficit-reduction plan – remain unresolved.