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Commentary :: International
Psychology of Crisis
24 Mar 2008
Psychology has a great influence on developments of ther world economy. In Tokyo, the S7 states agreed to avoid negative terms to not worsen the situation. Neither the extreme price drop of the dollar nor of the Yen were mentioned in the final declaration.

The G7 states counter the financial crisis that has already seized Japan and Spain with beautiful words instead of concrete measures

By Ralf Streck

[This article published in the German-English cyber journal Telepolis 2/11/2008 is translated from the German on the World Wide Web,]

The seven leading industrial countries (G7) met in Japanese Tokyo at the beginning of February 2008. The finance ministers and the head of the US Federal Reserve conferred about turbulences on the financial markets [1] and the risks for the world economy that started from the US credit crisis. Except for appeasement formulae, not much was heard about the crisis. Concrete measures were not resolved. The markets reacted reserved. Even professional optimists on the stock exchanges slowly ran out of steam. That the European Central Bank (EZB) did not lower the key interest rate at the beginning of February led the stock exchanges to go downhill again.

Psychology has great influence on developments of the world economy. In Tokyo, the G7 states, the US, Japan, Germany, Canada, Great Britain, France and Italy agreed to avoid negative terms to not worsen the situation. That was already manifest at the mini-summit in London. [2] There was no mention of a threatening recession in the US although clear warnings were sounded at the Davos World Economic Forum. [3] This had consequences for the whole world economy. Despite “uncertainty” about the weaknesses of the US economy, spokespersons agreed on a soothing phraseology. The basic data of the world economy is still solid, the joint declaration said hopefully. The growth slowdown could have different manifestations in different countries. Growth has “weakened considerably” in the US. There are risks regarding high raw material prices, expanding problems on the US mortgage market and inflation dangers.

“We are ready to take necessary measures to stabilize and secure the financial market so the international integration of financial markets and financial instruments work for the well-being of the world economy,” the final communiqué declared. [4] Improvement of the liquidity and risk management of banks and more transparency were urged. The risks must now be fully disclosed. Better cooperation with supervisory authorities and a greater role of the International Monetary Fund (IMF) were emphasized. No concrete agreement on small steps occurred. Every country has to take monetary- and fiscal action “appropriate to the respective conditions,” it said nebulously.

On the eve of the meeting, German finance minister Peer Steinbruck spoke of recessive tendencies in the US economy. He saw dangers in credit card financing and car-credits. No one knows the magnitude of these risks and whether they will be realized. He estimated the write-offs of the US mortgage crisis at $400 billion. Since $200 billion was written off in the books of the banks, continuous frightening news can be expected throughout 2008 despite the beautiful words from Tokyo.

To not endanger the unity on display, concrete measures could not be resolved. by individual G7 states. The final declaration did not mention either the extreme price fall of the dollar or the fall of the Yen. The Yen has lost almost half of its value since the turn of the millennium compared to the euro, a twelve percent decline in the last twelve months alone. In Tokyo, there was only wise advice for others. China was pressed to a faster upgrading of the Yuan given its increasing balance of payments surplus and its high inflation. The oil-producing countries were also urged to raise their production to lower the high price.


The pessimism of the president of the European Central Bank, Jean-Claude Trichet, was also not reflected in the final declaration. [5] At the beginning of February 2008, the EZB left the key interest rate for the euro zone at 4 percent for another four weeks. Still Trichet left the door open for immediate lower interests. He no longer categorically excluded lower interests despite the high inflation as he did in January. At the press conference after his interest decision, he emphasized the economic risks had clearly grown. “The economic cooling in the most important trading partners will reduce growth in the euro zone,” he said.

The central bank president is under the pressure of the market and politics. After the two big interest reductions of the US Federal Reserve to 3 percent, the British central bank also lowered its key interest a quarter of a percentage point yielding to demands to stimulate the faltering economy in Great Britain. Unlike the EZB, the Bank of England has more possibilities. Its interest level at 5.25% is at a high level again while the December inflation rate of 2.1 percent is near the target of 2 percent.

Trichet does not talk about this. The EZB inflation goal of 2 percent moves further away. Different from 2007, the European statistical board Eurostat estimated inflation at 3.2 percent at the end of January. [6] The cost of living at the beginning of the year hit a record high since the introduction of the euro. To fulfill its task, the EZB must be concerned about currency stability and raise the interest rate. That the EZB and Trichet do not mention this shows their fear despite their outward optimism that the economy in the euro zone could fall in a downward maelstrom. The stock prices fell into the cellar since the financial markets did not expect any lower interest from the EZB. Clear steps to counter the negative developments could be expected after seeing the dangers. Beautiful words as in London and Tokyo do not really help. The real crisis is imminent. [7] Therefore the final declaration of the G7 gives little courage to investors. Ryoher Mirametsa of the Commerzbank in Tokyo demanded urgent solutions for his two great worries which are different than those of the G7 states: “the collapse of the finance markets and the drifting of the US economy into recession.”


In Tokyo, it was said that no economic programs and no necessity for such programs exist in Europe. But that was not true. Spain has long had a program. The official inflation in Spain set a new record at 4.4 percent in January 2008. According to the Ciaxa bank, [8] inflation for essentials is already at 7.9 percent for the average saver. [9] Fuel and milk led the list with a 31 percent price jump; bread rose more than 16 percent; eggs almost 10 percent and fruits nearly 8% in Spain.

Since the summer of 2007, unemployment has risen continuously despite allegedly high economic growth of 3.8 percent in 2007. In January 2008, there were 132,000 more unemployed. This was 6.2 percent more than the previous month, the greatest increase since the end of the dictatorship in 1975. Because of the constantly lower interests of the Federal Reserve, the dollar has fallen to new lows over against all other important currencies making imports in the US more expensive. Officially 2.3 million persons in Germany are now without a job. The large majority of the new unemployed come from the service sector. This shows the real estate crisis and the higher prices have long affected general consumption.

Prime Minister Jose Luis Rodriguez Zapatero wanted to give every taxpayer a tax credit of 400 euro in June. This is not only an election campaign tactic but involved buying voters. To pass the law, the socialists (PSOE) have to win the election on March 9 for their targeted economic policy. This sum is equivalent to the $600 obtained by consumers in the US through the economic program to stimulate consumption in event of a recession. In the meantime, Zapatero announced [10] his measure will be expanded. Independent persons should also enjoy tax advantages. 700 million euro should be added to the estimated five billion that the hidden economic program will cost.

He admits openly the economic data of the country is not good. A 2008 growth of 3.1 percent is expected according to the government’s statistics. Therefore more billions should be pumped into the starving construction sector through public spending. [11] Economics minister Pedro Solbes, former European Union commissioner for the economy, still does not see what was really foreseeable for years. [12] “We did not foresee that real estate financing would be impacted so intensely,” he said. [13] In 2007 alone, there were 30,000 to 40,000 real estate broker offices in Spain. [14] This shows the extent of the real estate crisis in Spain. Four years ago, even the socialists conceded that people would have heavy debts for their lifetime. [15] to gain their first apartment. Spain only represents the beginning. Similar programs will be enacted in other European Union countries.

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