(4 of 5)
But just as it's impossible to implement any real reform in an election year in the U.S., so it is in China. Worried about an abrupt slowdown that might create higher unemployment and social unrest before the new Politburo takes power, the Communist Party has introduced a new stimulus plan, one predicated mainly on the same old kind of growth. While there are a few steps to boost private consumption--like a one-year scheme to subsidize the purchase of energy-efficient appliances--it's mostly business as usual, with a lot of big infrastructure projects that are helping fuel a real estate bubble that makes Florida and Arizona look tame. "Prospects that the Chinese economy will soon be put on a more sustainable, consumer-led footing look remote," says Capital Economics' chief Asia economist, Mark Williams.
From Bad to Where?
The most rational actors in all of this may be the Americans, who have done a respectable job of getting their personal debt loads down since the financial crisis and have slowly begun spending again, which is one reason the U.S. economy is in better shape than Europe's. But that consumer recovery is still delicate, to say the least. And job growth is anemic, which restrains wage growth, so incomes are flat. According to the Economic Cycle Research Institute, income growth over the past three months has been lower than it was at the start of the past 10 recessions. That's what this "recovery" looks like. The result is that the U.S. economy is "as sensitive to external shocks as I can remember it ever being," says Jim O'Neill, Goldman Sachs' chief economist.
There will likely be plenty more shocks in the long, hot summer ahead. The next three months will bring a resolution, one way or another, to the euro-zone crisis. Soon, the Greeks will either vote to continue with austerity measures or else break from Europe, reissue the drachma and begin the first chapter of a new, volatile post-euro era. If that happens, the value of the euro and any new currency would surely plummet, and social unrest would soar.
European leaders are frantically working to come up with a last-minute solution to avoid a Greek exit, a Spanish banking meltdown and a broader euro breakdown, like allowing some bad European debt to spill over into a giant communal pool that might be paid at a later date. But markets aren't buying it. It's clear that they want a guarantee that Germany and the Bundesbank (via the European Central Bank) will write a very large check to cover whatever the bad debt of Europe turns out to be.
The Germans, in turn, want assurances that they'll have some control over how their neighbors spend in the future--assurances that have become trickier since Franois Hollande won the French presidential election and made it clear that France isn't keen to give up its fiscal independence. Most economists, spooked about another Lehman event, are holding out hope that European leaders will come to some sort of epiphany and get their act together to save the euro.