New Measures Against the Most Complex Crisis Yet

The deep crisis affecting the global economy differs from all previous ones in its complexity, scope, and the enormous government interventions aimed at alleviating it, with the latest to decide on additional intervention being the German government.

Eight months before the elections, the conservatives of German Chancellor Angela Merkel and their coalition partners, the Social Democrats, have agreed on new aid for the largest European economy, which is going through the toughest crisis since World War II. The second package of economic stimulus measures is worth 50 billion euros and includes investments, tax relief, and support for companies. The first package was worth 31 billion euros. “This is the largest package of measures Germany has ever seen,” said Finance Minister Peer Steinbrueck to the German TV station WDR.

The central point of the new package of German measures is an investment of 14 billion euros in infrastructure and education, which should preserve jobs. For assistance to the automotive industry, where it is estimated that every fifth employee in Germany works, 1.5 billion euros is allocated. Among other things, there is an incentive of 2,500 euros for the purchase of each new vehicle. Tax relief for households has also been agreed, which should reach 2.9 billion euros this year and 6.05 billion euros next year. Many other European countries are launching their aid programs for struggling economies. Britain announced a 20 billion pound economic measures package last November, and yesterday it also announced that it would invest half a billion pounds to combat long-term unemployment. France, on the other hand, announced that it could approve more money to help the economy, in addition to the already approved 26 billion euros.

The Most Complex Crisis Yet

Paul Volcker, former chairman of the U.S. Federal Reserve and key economic advisor to new President Barack Obama, believes that the financial crisis that pushed the U.S. into recession differs in complexity and scope from all previous ones. Volcker says he does not know how long the current economic problems will last, but authorities should use them as an opportunity to rebuild the financial system on more stable foundations. “There have been crises before, but this crisis is different. It differs in its great complexity and certainly differs from others due to the enormous government intervention. Also, its scope is more global than any previous crisis,” says Volcker. He emphasizes that the U.S. economy and markets are now feeling the negative effects of one of the largest bubbles in history. As he noted, it began with the rise in stock prices during the 1980s and 1990s, and then in real estate prices, which peaked in this decade.

“If we sum all this up, there is no doubt that this is the largest jump in asset values, the largest boom in all of human history,” says Volcker, who is highly regarded for his role at the helm of the Fed from 1979 to 1987. At that time, he helped stop a devastating inflationary spiral by raising interest rates to unprecedented levels. It is true that this resulted in a recession from 1981 to 1982, which created the highest unemployment since the Great Depression, but it laid the foundations for future growth. Volcker notes that efforts to rebuild the financial system will not be completed quickly, and that new legislation is likely to be adopted not this year, but in 2010. In the meantime, a negative trend prevails on global stock markets, as investors fear that large companies may report weak business results in the last quarter of last year due to the intensification of the crisis. The MSCI World Stock Index fell 1.5 percent this morning, continuing the negative trend for the fifth consecutive day.

A Thorny Year for the IT Industry

And technology companies expect a very thorny 2009. According to a report by the IT market research firm Forrester Research, governments and companies around the world plan to reduce their spending on computers, software, communication products, and consulting services by three percent this year. This would be the first decline in IT spending since 2002, when it was reduced by six percent. The reasons for this year’s gloomy forecasts in Forrester cite the recession, the strengthening dollar, and the continued decline in server demand. Some segments of that market are expected to stagnate. Thus, Forrester predicts that software sales this year will be at last year’s level of 380 billion dollars. However, it is not expected that the slowdown in IT spending will last long – next year, Forrester predicts a jump in that spending worldwide of up to nine percent. (H)