Global Crisis Blog

The Next Crisis: How a Headline Can Deceive

By Shlomo Maital

Can Israel anticipate the next global crisis  in time to act to avoid it?

On Aug. 3, all of Israel’s daily papers reported good news about exports.  The headlines screamed:  “India leaps to No. 2 export destination”.  Data from the Ministry of Industry, Trade and labor showed that in the first half of 2010, exports to India rose to $990 m., second only to exports to the U.S. and up from 8th place in the first half of 2009.  Exports to China climbed from 11th place to 5th place.   Conclusion:  Exporters have been targeting the fast-growing markets of Asia, while U.S. and European markets “have stayed firm”.   Good news.

So where is the crisis?   It is hiding – under a load of “fertilizer” (India sharply boosted its purchases of Dead Sea chemicals and fertilizer).   A third of Israel’s exports go to Europe, and 28 per cent to the U.S. These two key markets are about to decline sharply.   Together they comprised about $10 b. of  Israel’s exports in the first half of 2010.    The table accompanying the glowing report of success contains the real story:  Israel’s vulnerability to economic decline in its two main markets, America and Europe.

Global markets are supposedly going through a transition, known as “rebalancing”.  In this process, Americans save more, spend less, borrow less, export more and import less, while Asia (mainly China) saves less, spends more, imports more and exports less.  This will rebalance the global economy, which crashed when imbalance – money poured out of the US, goods poured in, mainly from Asia – ruined it.

This is a pipe dream.  Rebalancing will not happen.  China’s growth model is built on exports, and its success with the model means China will not abandon it, even if it continues to lend to the Americans.  Americans cannot spend less until governments slash “entitlements” (social security, health care), and politically this will not, cannot happen.  Meanwhile the US economy has begun to slide again.  New York Times columnist Bob Herbert reports that if you add to the official 14.6 million unemployed, the 5.9 million workers who have stopped looking for jobs, and the 8.5 million who have part-time jobs but want full-time, you get 30 million Americans who need work and cannot find it.  There are 3.4 million fewer private-sector jobs in the U.S. than a decade ago. This is why Americans feel down when G.D.P. numbers are up.  A slowdown has already begun.

As for Europe, it is confused, stumbling and in trouble.  The stabilization fund to bail out bankrupt EU countries is a fiction and may not be renewed in three years.  Europe is expert at keeping out imports to help its struggling economies.

The global system was designed to create growth. It was not designed to deal with global crisis and recession.  Most countries are now engaged in budget tightening – the opposite of what is needed.  Conclusion:  For exporting nations (like Israel), crisis looms.

What will replace collapsing markets in America and Europe?  Does Israel, and its exporters, have Plan B?