This is undoubtedly the first time in many years that the world economy has been threatened by three crises, each quite distinct in its origins, but whose consequences are intertwined, writes Valdai Club expert Jacques Sapir.
A new international economic crisis is clearly on the agenda for many commentators. The proliferation of problems in the banking systems of several countries, including the United States with Silicon Valley Bank and First Republic Bank, in Switzerland with the rescue of Credit Suisse, and in Germany with Deutsch Bank, have revived fears of a major financial crisis, as in 2008-2009. Other problems are also looming on the horizon, such as the sluggish growth of the countries of the European Union and the brutal slowdown of the American economy. This comes as economies have yet to fully recover from the Covid-19 crisis and are struggling with inflation not seen since the 1970s.
Finally, the gradual fragmentation of international trade relations, a creeping process since the end of the financial crisis of 2008-2009, has accelerated sharply with the sanctions rolled out by Western countries against Russia, worrying both international organisations and economists. This last problem entails the erosion of American pre-eminence, now challenged by China, India and more generally by the group of countries called the BRICS. All this leads to many potential causes of crisis. However, these different problems are not all happening in the same time frame. Their conjunction remains hypothetical, even if their existence is sufficient to create widespread concern.
It is clear that today the world economy has entered a zone of great instability. But seeing this does not necessarily imply that this instability will lead to a major global crisis.
A reminder is in order here: the major international crises, whether we think of the Asian and Russian crisis of 1997-1999 that was linked to the internet stock bubble at the very beginning of the 2000s, or the subprime crisis of 2008, occurred in situations of relative economic euphoria. This is also why these crises, which could have been only limited, took on the dimension they did. The period of euphoria preceding the crisis had created an atmosphere conducive to the relaxation of the attention of officials, both public and private, and to a weakening of regulatory institutions.
Thus, at the end of January 2008, Mr. Kudrin, then Minister of Finance of the Russian Federation, made fun of the difficulties of American banks and praised the place of Russia as a “haven of peace” in finance. This was indeed true in January 2008, but he had obviously not understood that if the banking crisis became open in the United States, its consequences would be global and that no country could escape it. This was exactly what happened when Lehman Brothers went bankrupt in September 2008. In a general panic, Western banks massively withdrew their capital from Russia, which, moreover, was faced with a sharp drop in the price of oil due to the collapse of solvent demand. Economic or financial euphoria is generally a very bad advisor.
Today, the least we can say is that the state of mind is not euphoria. The international situation is clearly worrying: from the crisis induced by Covid-19 we have moved on to the inflationary crisis, the effects of which are still being felt, and from this inflationary crisis to a major geopolitical crisis linked to the conflict in Ukraine. However, euphoria is not the only bad advice... A multiplication of problems can monopolise the attention of decision-makers because they have to manage day-to-day consequences and doing so distracts them from the main problem.
The crucial issue is identifying the main problem. The banking system naturally emerges in the list of “usual suspects”. Banking faces multiple problems. Faced with the very strong inflationary surge, the Central Banks, and first and foremost the Federal Reserve of the United States, proceeded to significantly and rapidly increase their key rates. This led to a bond crisis which, given the large share of bonds in banks’ portfolios, weakened them, prompting depositors to withdraw their money and causing the collapse of SVB and the disastrous situation facing many other banks. Very clearly, the rise in central bank interest rates has weakened the entire banking system. However, the regulation of this system, decided with enthusiasm in the dark hours of the financial crisis of 2008-2009, has only been partially and imperfectly implemented. “Quasi-banks” remain largely unregulated. As a result, the banks took adventurous positions when rates were very low, and this also explains their fragility with the sudden rise in these rates.
Finally, any major economic disorder, whether a rise in corporate bankruptcies or serious disruptions in capital movements, is likely to undermine a weakened system. Add to this the fact that the IMF seems to have returned to its old moon and is advocating a dangerous budgetary consolidation for many States where economic growth, after the pandemic, remains very fragile with the consequences that we imagine on the banks.
However, the banking system is perhaps too obvious an “usual suspect”; so obvious that a major crisis is unlikely. Central banks are ready to react in the event of a major disturbance, even if it could be feared that a multiplication of crises in medium-sized banks will end up saturating the attention of central bankers.
This brings us to the second of the “usual suspects” list: the European economy caught between the inflation crisis and the energy crisis. The latter is what threatened the countries of the European Union in the first place. This is why they spent during the winter of 2022-2023, according to a Breughel Institute study, nearly 798 billion euros, more than what they spent to offset the Covid-19 crisis. It is unlikely that such expenditures can be repeated on a regular basis without resulting in dramatic state indebtedness. As for the inflationary crisis, although the peak of inflation will have passed in the summer, inflation, for its part, will remain high overall for a fairly lengthy period. Core inflation is now rising in many countries. It seems, moreover, that this persistent increase is due to the fact that large companies seek to increase their margin rates in a reckless way. Faced with this, monetary policies are generally very ineffective.
However, this is the tool which is often mobilised by governments. There is therefore a significant risk that inflation will be combined with very weak growth, or even a recession, a combination that generally does not bode well. Significant recessionary pressures would cause an increase in the public debt ratio and an indebtedness that would be increasingly difficult to finance. A public debt crisis in several countries of the European Union cannot be ruled out, and its consequences would be much more serious than the Greek crisis of 2015. If such a crisis broke out in several countries simultaneously, economic consequences could be profound within the EU, but also internationally. This crisis would be a starting point for a more generalized crisis.
Finally, the third of the “usual suspects” is none other than the implosion of multilateralism and the fragmentation of trade and financial relations around the world. The calls we hear for the implementation of “friendly shoring” or for the relocation of certain essential productions, calls which are normal and correspond to the interests of certain countries, also contribute to this evolution. The constitution of the BRICS, a real and effective challenge to the leadership of the United States, contributes to this implosion of a multilateralism which has no doubt had its day.
Given the interpenetration of economic systems, the internationalisation of value chains, here too the consequences would be potentially serious. Moving from the US hegemony to a multipolar situation has its benefits but entails also risks during the period of change. The question here is a political one. As long as Western countries seek to impose “their” bloc and their visions of the major issues of international politics, the constitution in return of a bloc of countries opposed to these Western countries is logic. What is at stake here is no less than the de-Westernisation of the world, which is now inevitable.
This is undoubtedly the first time in many years that the world economy has been threatened by three crises, each quite distinct in its origins, but whose consequences are intertwined. A serious economic crisis, or the bursting of multilateralism, can very well lead to a new banking and financial crisis. The latter, in turn, will certainly aggravate the recessionary tendencies, and therefore the debt crisis, and the implosion of multilateralism. Certainly, the worst is not certain. The banking crisis is played out over a few days. The economic and debt crisis occurs over several months. The crisis of multilateralism can take several years.
However, what is new in today’s situation is the possible combination of these relatively short-term crises. This is the main risk. If each of these crises, taken separately, can be treated, the phenomenon of saturation of the cognitive and decision-making capacities of decision-makers, be they governments, central bankers, major international institutions, or even the leaders of multinational companies, makes it very unlikely that relevant responses can be found to these three crises.