On December 10, GMF hosted a Congressional staff lunch discussion with GMF Transatlantic Fellow Joe Quinlan, who delivered remarks on the current financial crisis, its root causes, and how the U.S. and Europe should respond. Joe's presentation provoked a lively discussion moderated by Sean Mulvaney, GMF's Director of Economic Policy at GMF. Sixteen Congressional staffers with foreign policy, trade, and financial services backgrounds attended, as well as one Member of Congress. This highlighted the pressing need for more sensible policy dialogue on global economic issues.
Quinlan sketched the root causes of the global financial crisis and did not neglect to criticize parties on both the American and European sides for contributing to the current crisis. Although Wall Street can clearly be considered "ground zero," the fault must be shared between banks, Congress, China, and Europe, whose poor planning and policies allowed the sub-prime crisis to morph into a full-scale and ongoing global credit crisis. The lifeblood of the global economy is credit and in a sense the economy "almost died" in September when the credit ceased to flow. Joe cited complacency in Europe as one of the central catalysts fueling the crisis. The European Central Bank chose over the summer to raise interest rates, a policy aimed only at keeping the inflation goals and ignoring the reality of impeding collapse of growth prospects.
Echoing the recent speech by Barack Obama, Quinlan stated that things will get worse before they get better. The credit problem is not going away any time soon, as banks are still faced with uncertainty and are reluctant to lend. He estimated that the U.S. economy might contract by four to six percent by the fourth quarter of 2009, and that the unemployment might reach 10 percent. On the European side, EU institutions will be largely unable to mitigate the credit problems because of a lack of a single European financial market and insufficiently coordinated policy response. Quinlan also worried about the cohesion of the Euro group and the future of the single currency. Policymakers must effectively communicate the depth of this problem to the public in the face of unhelpful alarmism in the media, particularly comparisons to the Great Depression. He pointed out that unemployment during the Depression peaked around 25 percent, and we are currently faced with a figure that will likely top out at 10 percent. This is an ominous number, however Joe emphasized that this is not something the U.S. cannot handle. Many of the staffers appeared surprised to hear that the U.S. is still the world's largest exporter of goods and services, with around 20 percent of world exports.
Finally, Quinlan emphasized that the transatlantic economy as the center and main engine of global commerce, and must be recognized and treated as such by both Americans and Europeans. The current financial disaster must be viewed as an opportunity to reform the world's financial architecture. In his words, "A crisis is a terrible thing to waste." Here we have opportunities to take new steps in convergence and restructuring of the world financial system, which is an effort that must be undertaken by the G20 with the United States and Europe working closely together. When asked about speculation on the role of emerging economies in driving world economic recovery, Joe remarked that the economies in countries such as China, India and Russia are simply too weak and underdeveloped to pull the world out of the current slump. In his words, "The ruble is rubble."