Tag Archives: European fiscal crisis

THE GREAT RECESSION, THE EUROPEAN FISCAL CRISIS AND LESSONS FOR PAKISTAN. Part 1: Background, The Roaring 90s and the rise of leverage

 

By Kashan Wali, exclusive to the PTH

Today is May 08, 2010. As I write these line it occurs to me that this weekend is one of the most critical weekends as the seven month long crisis that started with initial doubts about Greece’s ability to pay off the massive debt that Greece had accumulated. The world nervously watches the European debt crisis morph into a contagious financial nightmare. Investors are worried that indebted nations like Greece, Portugal, Spain and even UK have accumulated too much debt too soon.

Coming on heels of the subprime crisis in 2007 and 2008, the world economies and the financial system are still in the recuperation phase from the wounds inflicted from the subprime crisis and the subsequent Great Recession afterwards. Below, we examine the European debt crisis in more detail. We will also look at the lessons for Pakistan and other emerging countries. There are a lot more similarities between the Greek tragedy and the Pakistani fiscal conditions. For those who do not learn from others mistakes end up being others down the road.

But first let’s take a step back to the subprime crisis that had the fiscal implications for the United States and Europe. Even before the subprime crisis, let’s examine the roaring 1990s that were a direct result of the massive globalization unleashed with the arrival of the internet. This was an important decade as two most populous countries properly entered the global economic arena for the very first time. They were China and India. For the next two decades, we see an explosive growth in the world economic output, globalization of trade, fall in industrialized world inflation, falling yields and the rise of phenomenon called the “leverage”. A few decades from today, we may exclaim what a shame that such prosperity became a victim to excessive leverage and regulatory failure. Yet we have countless examples of this reckless behaviour throughout the human history.

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