The crisis Gordian knot

Publikacja: 10.09.2009 01:30

Krzysztof Rybiński, Partner in Ernst&Young

Foto: Fotorzepa, Raf Rafał Guz

[b]How will the world look like after the crisis? [/b]

Krzysztof Rybiński: Many great minds puzzle over, how is it going to be, when the crisis fades away? When the world’s economy returns to the path of growth, which is expected to be certainly slower than in the past decade, demand for energy is likely to increase again owing to fast developing Asian and South American countries.

[b]Will it imply another hike in prices of oil and other resources? [/b]

The China’s strategy, which consists in purchasing raw materials, suggests that China considers such scenario very seriously. And if it is overlapped with rising inflation, as a consequence of printing enormous amounts of money by the biggest central banks, we can anticipate the onset of a high global inflation, similar to the one following oil crises from 1970’s and 1980’s. Many economists forecast a scenario precisely like this in 2-3 years, which will be convenient for the governments of the countries, which increased budget deficits, trying to find a rescue from recession and led to increase in public debt.

[b]Russia recommends to introduce a new global reserve currency. Is it likely to happen? [/b]

Dollar has been the main global reserve currency since World War II. Yet, it is difficult to imagine a steady reduction in US trade deficit without a strong depreciation of dollar. And, if such scenario would be anticipated, financial investors, including central banks disposing of huge currency reserves, will try to reduce dollar’s share in their assets. Although this process is most likely to spread over decades rather than years, a question arises, which currency, or currencies, can replace dollar in the role of the global reserve currency.

[b]What will be the role of euro in this process? Will rapidly ageing Europe become an innovative centre of the world, or, sink in a demographic slump? [/b]

It is connected with the question, who will take the most important decisions in the global economy of the XXI century. The old G7 group loses importance. Will its role be taken over by G2 (USA-China), G3 (USA-China-EU), current G20, or perhaps a newly created decision forum? Will the role of a global policeman be still played by the International Monetary Fund, and if so, will its seat be still based in Washington? There is also a question, whether the direction, which was followed by the development of economic and financial theory in a few recent decades, was not a dead end. Today, we witness the triumph of the economists, who believed in effective government intervention, while the ones, who were on top not long ago and believed in market efficiency, make a long face. But, as long as government intervention, on unprecedented scale in the history of humankind, has perhaps saved the world from another great depression, already today we can see that the global growth is exposed to new risks, which have considerably been augmented by this intervention.

[b]Who will answer all these questions and when? [/b]

Probably, we will not find satisfactory answers to many of them. The current situation resembles a great Gordian knot. We can either try to solve it to no avail, or wait until enlightened minds turn up and help to cut it.