After the Iraq: A fragile World Economy

By: Dr D Kebschull

The war in Iraq has come to an end. Politically the United States are the absolutely undisputable number one in the world .The position of President Bush has never been stronger. But, the world economy does not show promising signs of a new upswing. The vulnerability of the American economy contrasts sharply with the political dominance.

These were the theses of a speech presented by Dr. Kebschull at the monthly German Business Lunch on 14th, April in New Delhi. Dealing with the topic of "World Economy and India after the Iraq War", he said that the European Union still may be the biggest market. But weeks before and during the war, it showed that politically it does not speak with one voice. Expectations that Europe could become the engine of growth during the next twelve months are just wishful thinking. Consumers and entrepreneurs see too many uncertainties. Investment and consumption expenditures therefore will remain on a low level. Exports, which were the main growth factors, are hampered by the nearly 30% revaluation of the Euro vis-à-vis the US Dollar. For the current year the Euro area will at best grow only by a mere 1%. In Germany the national product may only increase by 0.4%.

Indo German Export Promotion

Japan could not yet find the way out of its difficulties. The country is still struggling with recessive factors and stagnation. In the longer run China may have the potential to positively influence the world economy. But at present its economy is still too small for playing a decisive role. In addition, there can be expected a serious setback for China, Hong Kong and Taiwan the longer SARS creates panic.

Insofar the fate of world economy mainly depends upon the developments in USA. But just the US economy gives cause for concern argued Dr Kebschull. He said that there is still the - already traditional and structural - deficit in the balance of trade and of current account. It has now reached alarming scales. Things are getting worse because of the again grown budget deficit. The gap between income and expenditure is 380 billion US dollar. This is about 5% of the gross national product. Taking the increasing defence expenditures into consideration, it can be expected that this gap may even further widen in the year to come. The US apparently live at present beyond their means.

Increasing indebtness, low savings and the growing deficit in the balance of payments and in the budget don’t give reason for optimism. Looking at the American economy one inevitably asks, for how long it can go on like this, said Dr. Kebschull. According to him the USA need strong support and co-operation with other countries. This is most important with regard to the Dollar stability. So far most countries are holding exchange reserves mainly in US Dollars. Here the Far East plays a key role. Japan alone is sitting on 462 billion US $. Together with China, Taiwan and Hong Kong, East Asia at present holds more than1000 billion. If one or two of the Reserve Banks decide to restack its portfolio in favour of the Euro because of the strong Dollar devaluation, this could lead to a chain reaction. The Dollar would crash with immeasurable consequences for the world economy.

A similar development could result from sales of bonds, because of their low interest rate or decreasing confidence in the American economy. Japanese banks alone have US government bonds of 363 billion US Dollars. Chinese banks have accumulated more than 100 billion. Sales in a bigger way could lead to an absolute disaster since they would also influence the share markets and than in a domino effect the entire American economy and the world. To avoid this "intensive cooperation and partnership is more important than ever before" the speaker pointed out. "Solo efforts and confrontation must be avoided".

For India, Dr Kebschull saw a rosier picture. The country has a robust domestic market, he said. Its comparatively low export quota turns out to be a blessing in disguise in the present situation. Exports may grow considerably in spite of the dull world economy, mainly because of price advantages in Euro countries and the improved competitiveness of the industry. If the agricultural production is not impeded by an insufficient monsoon and the oil price remains within the expected limits, a growth rate between 5 to 6% should be possible.