Can things get worse despite the € 1 trillion guarantee?

The economic outlook not only for the United States, but also for Europe and the rest of the world has become bleaker recently. During the last few weeks, things have changed dramatically. The era of investment banks is over with Goldman Sachs and Morgan Stanley having changed their status voluntarily. We saw some banks fail, others being taken over. Though the $700 billion bailout passed Congress successfully and was signed into law by George W. Bush, nobody feels like being out of the mess. There is nobody making a profit due to the rescue package. This short-term fix is just aimed at preventing things from getting worse. Though this enormous government intervention doesn’t go down well with everybody, the financial rescue plan seems to be the best way the administration could respond to the tightening credit market, spreading panic and a weakening economy.

In Europe, even governments that were convinced that the credit crisis couldn’t affect their country seriously are now getting nervous. Several European economies have fallen into recession. Amongst them, Ireland, Italy and France. The European Commission expects the UK, Spain and Germany to fall into recession this year. After the leaders of France, Britain, Italy and Germany met in Paris last weekend, they all stated their willingness to take action, but as this being Europe, they had no clue how to make a joined approach to counteract the spreading anxiety and tightening credit markets. Instead, each nation is trying to find a fix itself and a pan-European solution is out of reach. We could see nationalizations of banks, smaller bailouts and guarantees. Especially Germany’s government which had ruled out the possibility of a recession for the last few months, was forced to act when the Hypo Real Estate financial group, a major property lending and banking company, needed a €50 billion bailout this weekend. On Sunday, the German chancellor announced a federal guarantee for private savings deposits. The value of the guarantee could surpass one trillion euros. This unprecedented guarantee should keep citizens from withdrawing their money from banks and contributing to the lack of liquidity. Despite the bailout of Hypo Real Estate and the guarantee, stock markets nosedived on Monday. This unexpected step rather confirmed the anxiety of investors.

Unimpressed by fear in America and Europe about the volatile financial markets and a significant global slowdown, China is stabilizing the global economy a bit with strong growth rates. Rather than the financial crisis, it’s the scandals of the country’s dairy industry that are making headlines.

Meanwhile, oil prices have hit an 8-month low due to an expected shrinking demand from crisis-torn Europe. Oil prices fell below the $90 per barrel mark. This being no excuse for being less concerned about oil dependence gets obvious when following Iran’s concern that oil prices are dropping too low. The country wants OPEC to counteract and stabilize oil prices at a high level. Undoubtedly, such a stupid policy would be the death-blow for the global economy.


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