One cannot underestimate the seriousness of the recent credit downgradings of Greece and Spain by Standard and Poor's, the global credit-rating agency. They were not surprising, considering the deep economic abyss into which those countries had fallen. But it is still a troubling sign for the global economic system.
The significance of the downgradings, especially changing Spain's credit outlook from "stable" to "negative," hints at what is in store for other, bigger economies - most notably the UK's.
Great Britain might have suffered the most from the global economic crisis. Over the past two decades, the UK economy has become more and more dependent on the financial sector.
A massive deregulation process, which began in 1986 with the "Big Bang Day," boosted London's position as the world's leading financial center - bigger than New York, Hong Kong, Tokyo and Frankfurt, which are all financial capitals of larger nations.
The boom in the finance industry also expanded to other parts of the economy, including restaurants, pubs, leisure activities and business tourism. But the biggest boost was in real estate. London had changed its face: Skyscrapers popped up everywhere, ambitious construction projects were created, and the new prosperity extended as far as Scotland.
It is not surprising that the UK's leading export sector was finance. The UK has become a center of foreign-exchange trade and services, the heart of the hedge-fund industry and the base of several stock exchanges.
History has a funny sense of humor. Massive deregulation gave the UK long-term prosperity, but it also fostered an unbelievable level of greed and recklessness that led to the current crisis. When the global financial system collapsed in 2008, the effect on the world's largest financial sector was devastating. Combined with a collapse in the real-estate market, whose bubble burst a year earlier, the UK economy faced the most serious downturn since World War II.
The UK economy is now paying the painful price of relying too much on unproductive and volatile sectors such as finance. When the tsunami hit the island's shore, it crashed the nation's leading financial firms: Royal Bank of Scotland, Lloyds, HBOS and Barclays. Prime Minister Gordon Brown, who as chancellor of the exchequer helped to inflate the bubble in real estate and finance, had no choice but to nationalize most of the banking system just to avoid the catastrophe of a nationwide run on the banks.
These super-expensive bailouts, the most massive in the Western world, and economic-stimulus plans that cost hundreds of billions of pounds, more than doubled the budget deficit to 11 percent of gross domestic product, a rate that is expected to jump to 13% next year.
This is where the British story becomes similar to the Spanish one. As in England, the Spanish economy enjoyed many years of growth that relied on real estate and finance (though in Spain the real-estate sector is the dominant one). When the crisis hit, the Spanish government also responded with huge stimulus and bailout schemes, mainly through worthless public projects.
The situation in Spain is more severe because it already had high unemployment, which is now threatening to reach 20% (in the UK it is about 8%). There are now huge public deficits and less chance of fixing the situation without raising taxes, something Spain's politicians are highly reluctant to do.
The deficits in both countries are getting out of control, and nobody can see that ending anytime soon.
Spain's situation is also worse because its debt is denominated in dollars and euros, both currencies the government can't just print by itself. The UK's debt is in pounds, so the government can, and does, print its way out like crazy.
But the future of the British economy is still grim. We are already seeing major players in London's financial playground reducing their presence there. HSBC, the world's largest bank, recently announced it was moving its main headquarters to Hong Kong. In addition, the Hong Kong administration has decided to withdraw its gold reserves from London.
The biggest threat is the so-called "bank tax," which is being promoted by Brown and his government to issue special taxes on financial institutions and put serious caps on banker's wages. This is a good idea, but it will almost definitely encourage a lot of London's inhabitants to move somewhere else.
Another difference between Spain and England lies in their political power and influence. Britain still has a lot of political power, much more than Spain, and when it comes to rating national debt, political power plays an important role. But then again, who ever thought S&P would downgrade the rating of the fourth-biggest economy in the euro zone?
A lot of things have happened over the past couple of years that should remind us of old axioms and beliefs. During the great days of Britain, its subjects used to be proud that the sun never set over their empire. It is very likely that we are now observing the final sunset of a nation that only 70 years ago ruled more than a quarter of our planet.