The same old story

What a difference a week makes. Well, at least that's what they say. But sometimes, this simply ain't true.

Coming back from a week's holiday, during which I didn't think once about Germany's economic problems or the world economy more generally, I was intrigued to see what had changed in my mental absence.

The short answer is: nothing.

OK, some of the superficial stories were different. In particular, I was shocked to see that Germany's SPD had once again hit the self-destruct button when Peer Steinbrück, the country's finance minister, unsettled the country's pensioners.

Telling pensioners that the country may not be able to afford to pay them as much in the future is good economics, but very bad politics just months ahead of a general election in September.

Wolfgang Munchau of the Financial Times Deutschland clearly believes that Peer Steinbrück is a liabilty — not just because of his loose mouth but also because of his lack of understanding of world economic problems.

Meanwhile, Martin Wolf, Munchau's colleague at the English version of the Financial Times, signed off before his summer holiday with a masterly summary of the world economic situation.

Wolf argues that the worst of the financial crisis is over, both in terms of the panic on the stock market and liqudity in the banking system. The authorities, he says, did what was necessary to calm the storm.

The world economy is also improving, says Wolf, pointing out that, for the first time since June 2007, the Organisation for Economic Cooperation and Development (OECD) had revised upwards its growth forecast.

But, as Wolf points out, the recovery will be weak and many dangers remain. These include the following:

• The world banking system is carrying too many dubious assets, is too dependent on government support, and is riddled with moral hazard.
• Consumers are cutting back hard to reduce their debts, particularly in the United States. This is unlikely to change, and the (almost) inevitable consequence is a rise in public-sector deficits.
• Deflation is a greater risk than inflation, as in Japan in the 1990s.
• The international monetary system, based on the dollar, may no longer be stable.
• Emerging economies — such as those of central and eastern Europe — are very vulnerable.