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It is Europe's and Asia's Turn Now

Sam Vaknin, Ph.D. - 10/13/2008

The crisis in the United States has little to do with its real economy. Last quarter, GDP there grew by an impressive 3.3%. IBM's profits are up 22% year on year. American commercial banks, though in need of re-capitalization, are sound. Its investment banks - the sources of the current crisis - are gone. The Dow Jones is unlikely to drop below 7100. The end of the crisis is near. The Treasury will semi-nationalize some banks (take equity positions against an injection of capital), buy some toxic debts and that's it. Within 12 to 18 months, the USA will emerge from this crisis, strengthened and Wall Street will be back at 10,000.

Not so Europe.

Europe's real economy as well as its financial sector are a mess. France's GDP declined by 0.3% last quarter. In sliding officially into a recession, it has joined Spain, Ireland, and, now, the United Kingdom and Germany. Battered by a strong euro, expensive energy, and mighty competition from China, the US, and India, European exports have stagnated. As opposed to the USA (where exports constitute 18% of GDP), Europe is dependent on foreign carbon fuels and foreign markets for its goods and services. Exports constitute more than 40% of Eurozone GDP.

Moreover, Europe's commercial banks are in horrible shape - far worse than America's. This year alone, European banks must pay 1.41 trillion US dollars in principal and interest, mainly to bondholders. They don't have the money and they cannot borrow it from other banks because interbank lending has all but dried up. Many of them are already technically insolvent.

Europe's recession will be profound and protracted. Asia is likely to follow suit: Singapore is already technically in recession and china's growth rate is abating. It seems that yet again, the USA will be faced with the daunting task of dragging the rest of the world back to growth and profitability.