One Crisis, One World

GENEVA – As recession spreads around the world, the global production networks that arose with the globalization of the world economy have become sources of cutbacks and job losses. Postponing purchases of new winter coats in the United States means job losses in Poland or China. These losses then translate into reduced demand for American or German machine tools.

Unemployment and reduced sales then feed back into new losses in banks’ loan portfolios, further weakening the battered financial sector. As a result, anxiety, hopelessness, and anger are spreading, as what was a financial crisis becomes an economic and human crisis. Unchecked, it could become a security crisis.

Trying to rescue the financial sector without supporting a recovery in terms of businesses, jobs, and family purchasing power will not work. What is needed is a large worldwide fiscal stimulus to counteract falling private demand.

Different countries’ capacity to act depends on their indebtedness, foreign exchange reserves, and current-account deficits. Germany and China can do more than others. The US can do a lot, in part because of the dollar’s status as the main international reserve currency. Low interest rates mean that the additional debt burdens that public borrowing will create can remain manageable.