European Union flags in Brussels 311.
(photo credit: Thinkstock/Imagebank)
For some reason financial “experts” are predicting a good year in 2012. Wall
Street strategist Brian Belski and Standard and Poor’s analyst Howard
Silverblatt predict that stocks will rise about 10 percent. Everywhere are
headlines like “pros see stocks rising in 2012” and “analysts see stocks
climbing in 2012.”
That is all well and good except, as Bernard Condon at
the Associated Press notes, the “experts” also predicted gains in 2011. It is
worthwhile looking back over the past year to get an idea of what may be in
store for next year’s global economy.
The Dow Jones Industrial Average, a
gauge of the US financial market, is ending the year almost precisely where it
started, at around 12,000 points. European and Asian markets generally had a
worse year than New York’s stock exchange. US financial markets have recovered
since the disaster they suffered in 2008, which was a long-term result of a
sub-prime mortgage crises.
It turns out 2011 was a relatively good year
for US home sales, which were up 7% in November. That means more people are
buying homes, but the price of real estate has not changed, and has actually
continued to decline, albeit slightly. The spike in home sales has been fueled
by record-low interest rates: Wells Fargo, a major bank, estimates that a
30-year fixed-rate loan, which is a typical type of home loan, will come with a
rate as low as 3.875%.
IF THE US economy seems to have weathered the
storm in 2011 and recovered from many of its problems, it is no secret that the
world’s real economic problems are in Europe. All of 2011 was overshadowed by
discussions about Greece defaulting on her debts or leaving the Euro, plunging
markets into chaos again and again.
The EU response has been tepid, as
Germany and France, the largest economies, wrestle with possible solutions. Some
fears have been allayed with news that Italy’s borrowing costs declined to 3.2%
when it raised $11.8 billion in late December. Borrowing costs are a measure of
volatility, so the fact that Italy is paying less interest is a sign that
investors feel there is less risk of an Italian default.
In November, an
auction of Italian bonds had forced the country to pay upwards of 6% to raise
money. It was because of this that Italy was said to be the “next Greece” with
fears that financial contagion would spread from Italy to Spain and Portugal and
from there to the gates of Paris and Berlin.
However, Europe’s economy
still suffers from other issues. The first is that the European Union has become
more ham-handed in its regulatory behavior. In one instance it denied the right
of mineral water makers to claim their products guarded against
dehydration. In slapping record fines on Intel and Microsoft several
years ago, it proved itself to be wary of foreign innovation and fearful of
penetration of its markets.
In another case the EU continues to provide
subsidies to Airbus, against a decision by the World Trade Organization. In that
dispute the US has asked the WTO to impose trade sanctions of up to $7b.
annually on the Europeans. Over-regulation and protectionist trade
policies will hamper the continent’s long-term prospects, rather than protecting
More worrying was Germany’s decision to to scrap its
nuclear power stations. Nuclear power is the clean innovation of the
future, a 20th-century technology that is perfect for the 21st century’s
interest in clean energy. But the tsunami in Japan led to widespread irrational
fears, and nuclear power is being rolled back. In the end this will be a
long-term disaster for Europe and other places, as economies continue to rely on
In thinking about fossil fuels it is important to recall
that oil prices increased due to the Arab Spring, falling back to the $90 a
barrel price range in the fall before climbing again to $99 a barrel in December
following Iranian threats to close the Straits of Hormuz if sanctions are
imposed. It should be recalled that the Iranians attempted something similar in
1984, with limited success, during the Iran-Iraq war.
Because of turmoil
in the Arab world the oil fields in Iraq and Libya remain threatened and the
Iranian problem casts a shadow over the future price of oil. At the same time
the West’s dreams of electric car technology are not being realized. Only 6,142
Chevy Volts were sold in 2011 and only 8,720 Nissan Leefs. By contrast 11,375
Ford Focuses were sold in just November 2011.
This year is going to see
several continuing trends. The “occupy” movement and various populist
anti-capitalist protests will remain. At the same time the “second world”
will continue to outpace the first, with the strengthening of the Chinese Yuan to record
levels and reports that the Brazilian economy has overtaken that of the UK.
Interest rates will remain high in Europe and the US dollar will remain
pressured by the fact that US has no good plan to repay its deficit or balance
The good news from 2011 is that despite economic jitters
related to the Euro the world economy continued to improve. The bad news,
however, is that the long-term structural problems associated with European
monetary integration and US debt issues have not been resolved.
writer has a PhD from the Hebrew University and is a fellow at the Jerusalem
Institute for Market Studies