The Messy Politics of Economic Divergence

The world is increasingly characterized by divergence – in economic performance, monetary policy, and thus in financial markets. Though there is a broad consensus on what must be done to rebalance the global economy, political leaders remain unwilling to fulfill their economic-governance responsibilities.

LAGUNA BEACH – The world is increasingly characterized by divergence – in economic performance, monetary policy, and thus in financial markets. Global divergence has already contributed to stock-market volatility, unprecedented declines in advanced economies' government bond yields, and outsize currency movements. And the trend is not abating, placing increasing pressure on already-strained political systems.

The world's systemically important economies can be placed into four categories. The first group includes countries like India and the United States, where economic recovery is broadening, enabling them to overcome financial imbalances. The second group is exemplified by China, which is achieving a soft landing onto a growth path that, while lower than in recent years, remains adequate to support continued progress toward high-income status and financial stability.

The third group includes economies – such as Brazil, several eurozone countries, and Japan – that are not growing fast enough, and face downside risks. And, finally, the fourth group consists of economic and financial wildcards like Greece and Russia – countries that could succeed in restoring growth and financial stability, but could just as easily implode, sending shock waves across Europe and beyond.

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