The decline in the Dow Jones industrial average since it began falling in 2007 has mimicked the rate of decline that occurred during the Great Depression over the same period. The advice from a Federal Reserve Bank chairman of that era was that for the sake of economic recovery, "the safest policy is the boldest policy." So far, both in the United States and in Europe, boldness among policy makers has been in short supply. "The leaders of the European Union gathered on Sunday in Brussels in an emergency summit meeting that seemed to highlight the very worries it was designed to calm: that the world economic crisis has unleashed forces threatening to split Europe into rival camps," The New York Times reported. "An urgent call from Hungary for a large bailout for newer, eastern members was bluntly rejected by Europe's strongest economy, Germany, and received little support from other countries. Chancellor Angela Merkel of Germany, facing federal elections in September, said countries must be dealt with on a case-by-case basis. " 'Saying that the situation is the same for all Central and Eastern European states, I don't see that,' Mrs Merkel told reporters. She spoke after prime minister Ferenc Gyurcsany of Hungary warned: 'We should not allow that a new Iron Curtain should be set up and divide Europe.' " The Guardian said: "Hungary, which along with Latvia and is arguably the hardest hit in the EU by the financial meltdown, tabled an ambitious plea for a new pan-European 'stabilisation plan' to shore up the banking sectors and budgets in eastern Europe and warned of dire consequences for everyone should the call go unheeded. 'Failure to act could cause a second round of systemic meltdowns that would mainly hit eurozone economies,' said the Hungarian government. "Refinancing needs in central Europe this year could total ?300bn (£265bn). 'Massive contractions in economic activity and large-scale defaults' could result from a failure to act. 'A significant economic crisis in eastern Europe would trigger political tensions and immigration pressures,' said the Hungarians, who demanded a regional rescue fund of up to ?190bn. "But their pleas were dismissed as overwrought and inappropriate. A participant in the meeting said Budapest's argument was met by 'silence and no enthusiasm'." The Wall Street Journal noted: "The recession has struck the 27 EU nations with widely varying force. Large and steady economies such as Germany's are facing an inevitable slowdown, but smaller peripheral states such as Latvia, Bulgaria and even Ireland have been brutally whipsawed from an era of heady growth to shockingly fast decline. "The impact on Eastern Europe, which boomed in recent years, has been especially intense. Latvia, which financed its own expansion by borrowing from abroad, is literally running out of money as the credit crunch shuts those spigots off. Last week, Standard & Poor's cut Latvia's credit rating to junk. "And, as some in Eastern Europe warned, deep pain could well emerge elsewhere. All eyes are on Ireland, which is slashing public-sector pay as it scrambles to close a budget deficit that could reach nearly 10 per cent of gross-domestic product. A protest last month in Dublin drew more than 100,000 people. "Other large countries, such as France and the UK, face substantial domestic troubles and have little desire to persuade their populations to add the East's problems to their own." Meanwhile, to the immediate east of the EU bloc in Ukraine economic conditions are especially precarious. "Steel and chemical factories, once the muscle of Ukraine's economy, are dismissing thousands of workers. Cities have had days without heat or water because they cannot pay their bills, and Kiev's subway service is being threatened. Lines are sprouting at banks, the currency is wilting and even a government default seems possible," The New York Times reported. "Ukraine, once considered a worldwide symbol of an emerging, free-market democracy that had cast off authoritarianism, is teetering. And its predicament poses a real threat for other European economies and former Soviet republics... "It is not hard to understand why world leaders are increasingly worried about the discontent and the financial crisis in Ukraine, which has 46 million people and a highly strategic location. A small country like Latvia or Iceland is one thing, but a collapse in Ukraine could wreck what little investor confidence is left in Eastern Europe, whose formerly robust economies are being badly strained. "It could also cause neighboring Russia, which has close ethnic and linguistic ties to eastern and southern Ukraine, to try to inject itself into the country's affairs. What is more, the Kremlin would be able to hold up Ukraine as an example of what happens when former Soviet republics follow a Western model of free-market democracy." The economist, Paul Krugman, said: "It's a depressing spectacle: on both sides of the Atlantic, policy-makers just keep falling short - and the odds that this slump really will turn into Great Depression II keep rising. "In Europe, leaders rejected pleas for a comprehensive rescue plan for troubled East European economies, promising instead to provide 'case-by-case' support. That means a slow dribble of funds, with no chance of reversing the downward spiral. "Oh, and Jean-Claude Trichet says that there is no deflation threat in Europe. What's the weather like on his planet? "On this side of the Atlantic, Tim Geithner seems committed to the view that banks should stay private even if they're bankrupt, because - well, just because... "And we have the spectacle of James Baker - James Baker! - attacking the Obama administration from the left, calling for temporary nationalisation of zombie banks as part of the recapitalisation process. "The sickening feeling of drift - the sense that policymakers are refusing to face hard facts, and are dithering while the world economy burns - just keeps getting stronger." And in The Financial Times, while Mr Baker preferred not to use the term "nationalisation", this is how he advocated bringing banks under government ownership: "we should divide the banks into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless. The needy should be reorganised and recapitalised, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage. "To prevent a bank run, all depositors of recapitalised banks should be fully guaranteed, even if their deposit exceeds the Federal Deposit Insurance Corporation maximum of $250,000 (?197,000, £175,000). But bank boards of directors and senior management should be replaced and, unfortunately, shareholders will lose their investment. Optimally, bondholders would be wiped out, too. But the risk of a crash in the bond market means that bondholders may receive only a haircut. All of this is harsh, but required if we are ultimately to return market discipline to our financial sector. "This is not a call for nationalisation but rather for a temporary injection of public funds to clean up problem banks and return them to private ownership as soon as possible. As president Ronald Reagan's secretary of the Treasury, I abhor the idea of government ownership - either partial or full - even if only temporary. Unfortunately, we may have no choice." In the Los Angeles Times, Mark Nelson said: "It has become in recent months almost a reflex for Republicans to dismiss Franklin D Roosevelt's New Deal as a dismal failure of the Democrats - a 'jihad against private enterprise' as Fox News' Britt Hume put it recently. But Roosevelt's spending plan, unlike President Obama's, had widespread Republican support. In fact, he was criticised in some quarters for not spending more. And one of his chief critics was a prominent Republican. "On March 6, 1935, the head of the Federal Reserve, Marriner Eccles, issued a stern warning to Roosevelt: Given the 'totally inadequate' amount of money that the administration was prepared to spend to jump-start the economy, there was no reason 'to expect any substantial improvement'. "Eccles, a self-described 'child of the Republican Party,' then sounded a prophetic note: 'If we spend some every year, but not sufficient to give the required stimulus to private expenditures, we can build up a large debt and still not be out of the Depression.' Thus, Eccles suggested, 'the safest policy is the boldest policy.' " While most of the world is in the grip of a financial crisis whose depth and scope remains uncertain, The New York Times noted that India's economy continues to grow. "India's trillion-dollar economy remains a relative bright spot, some say, in part because the country's bureaucracy and its protectionist polices have kept it insulated from the fallout of the global downturn. " 'India is not as vulnerable' as other countries, said Rajeev Malik, head of Indian and Southeast Asian economics at Macquarie Capital, who recently wrote a report titled 'India: Better Off Than Most Others'. "On Friday, India reported that its economy grew 5.3 per cent in the quarter ended in December when compared with the previous year. While that was down from the 7.6 per cent growth in the earlier quarter, it was in sharp contrast to the retrenchment in other countries."
pwoodward@thenational.ae
