One year ago, LEAP/E2020 anticipated that the year 2007 would mark the US entry into what our team then called “the Very Great US Depression”. At that time, the dominent spirit was overwhelmingly euphoric. The word « subprime » was still unknown among the general public and experts estimated that the US housing crisis would bear no consequences for the rest of the US economy (and they simply refused to very idea that it could have the least global impact).

In the course of 2007, facts however proved that a global systemic crisis was indeed throwing down all the principles the global economy was based upon since 1945; and that, along with the GEAB’s analyses in September 2007 (GEAB N°17), the seven sequences of the impact phase of the global systemic crisis would simultaneously reach climax in the course of the year 2008.

One aspect, and a catalyst, of this global systemic crisis is the United States’ stepping into an unprecedented ( [1]) socio-economic crisis in 2007, hitting hard on households ( [2]) as a result of the housing bubble burst and of their increasing insolvency, soon followed by financial operators’ insolvency, due to the pure and simple evaporation of USD hundreds of billion-worth in assets.

In 2008, in addition to these two types of US players, companies will be hit as are caught in the crossfire between credit crunch and the collapse of housedold consumption, as well as public organisations whose fiscal revenues crumble. From now to this summer in particular, the financial crisis triggered by the US subprime mortgage loans will turn into a much wider-ranging crisis involving the implosion of the Credit Default Swaps (CDS) market. This will represent a now tipping point in the impact phase of the global systemic crisis (see detailed analyses in the rest of the GEAB N°21).

Asia, Europe and emerging countries in 2008 – Direct but mitigated impact of the Very Great US Depression: Recession, stagflation and Western financial institutions taking control

Simultaneously, the diving of the US into the Very Great Depression will bear a full direct impact on global economy altogether:

. The Eurozone will step into a perdio of stagflation while the rest of the EU (UK in the first place) will be sucked up in a recessionary process. Denmark (and probably soon after Sweden) are preparing to join the Eurozone, as Prime Minister Fog Rasmussen ( [3]) clearly expressed who recently resurrected the idea of holding a referendum on the Euro. These two countries are aware that the Eurozone will not cause any difficulty to their joining (under the Treaty, Sweden should in fact already be part of the Eurozone because it is required to adopt the Euro at a certain time) ( [4]).

This sudden Scandinavian craving for the single currency is not the result of any recent conversion to the merits of European integration, but their growing awareness of the magnitude of the upcoming monetary, financial and economic turmoil, which could be lethal for small-sized economies not protected by a complete integration to larger entities.

On the East of the EU, many countries are striving to reduce the time needed to join Euroland. However the differences in economic situations are still too important for these countries to be fully sheltered when the tempest hits full shot in 2008 (even Denmark and Sweden are lagging behind events).

In fact the Eurozone will not present exciting prospects in the year to come, with a growth rate around 1 percent. But compared to the rest of the world, it will be by far the area least affected by the impact of the crisis. The risk of internal divergence among the economies of the Eurozone are obviously real (and our team often detailed their anticipations on this subject in recent issues of the GEAB), yet the overriding feeling today in the Eurozone is about preserving a currency that seems to protect quite efficiently the Europeans using it from external turmoil.

This situation will require from the ECB and for the Eurogroup to find most efficient means of cooperation, taking into account the expectations of both the public opinion and the various economies. In the last few months, anti-ECB political speeches (Nicolas Sarkozy’s, in particular) became dormant. And, considering that Germany is also about to be affected by the EUR/USD rate (soon climbing above 1.50 and heading towards 1.70, before the end of 2008), all the players of the European monetary and economic game will be ready to move on. According to LEAP/E2020, this will take the form of a 2 to 3 percent increase of maximum acceptable inflation rate by the ECB.