Europe is slumping, the Arab Spring has become a cauldron and China’s economic direction remains a guessing game. Basic questions about financial regulation in the post-crisis world — how big is too big to fail? — remain a source of intense disagreement and potential trouble.
While Washington is preoccupied with the melodrama over the “fiscal cliff,” the rest of the world has a stockpile of other problems that threaten the global economy. Even if Congress and the White House reach a deal to avoid the worst of the automatic spending cuts and tax hikes, fundamental questions remain about how the world gets back on track.
“Say the fiscal cliff is solved in a comprehensive way. Where does the growth start coming from?” said Clay Lowery, vice president of Rock Creek Global Advisors and a former Treasury Department official. “Europe is in recession. Japan is about to go into recession. Growth in emerging markets has slowed.”
The unsettled outlook was evident in Europe this week, as officials made strides toward further calming the euro zone’s immediate financial crisis, while economic data confirmed how weak the region’s economy remains.
Officials in Brussels approved plans to have the European Central Bank take over regulation of major financial institutions in the euro zone, an important step toward sharing the costs of financialsector problems so they don’t bankrupt any individual country. They also approved the latest loan payments to Greece, buying more time for the most troubled euro-zone nation.
But the latest data from the Eurostat statistical agency showed industrial production sliding sharply throughout the 17-nation euro currency zone and the larger European Union. Even powerhouses such as Germany are being drawn down, with industrial output off nearly 4 percent since a year ago. Regionally, production in key areas such as appliances and other durable consumer goods has fallen as much as 6 percent since last year.
The situation has left analysts speaking of a sharply segmented world — of Europe and Japan in a perpetual funk, the United States headed for modest growth and developing nations doing better. What’s uncertain is whether that translates into an overall stable and growing world economy, or one that merely trundles along, dependent — as it has been — on consumer spending and other factors in the United States.
Some corporate leaders and other analysts are upbeat about the post-cliff world. They note the healthy cash balances of many corporations and say their own hiring and investment plans have been tempered in large part by uncertainty over the U.S. fiscal situation. Take that off the table, and the stage could be set for a U.S. rebound that would help the rest of the world as well.
“There is the possibility of a robust economic recovery if we are smart here. . . . If all of a sudden we can demonstrate that we can govern ourselves, we could affect the world,” said Honeywell chief executive David M. Cote, a member of the National Commission on Fiscal Responsibility and Reform. He said the United States needs a tax-and-spending package of at least $4 trillion to be judged “credible” by investors and trigger renewed growth. As head of Honeywell, he has frozen most hiring and capital investment because of uncertainty about the fiscal cliff — a strategy other corporate heads have followed as well to hedge against a new downturn.