Michael Heise: It is important to remember that governments took a conscious decision to ratchet up debt in order to combat the crisis. We would have seen devastating consequences without the massive stimulus packages and the measures to shore up the financial system.
Dissecting the Fiscal Crisis
The World Economic Forum (WEF) has called the fiscal crisis and rapidly growing national debts one of the key risks of 2010. Do you agree?
So, the surge in national debt is not surprising. Nevertheless, the situation we are now facing is a challenge. It's essential that consolidation starts in 2011 at the latest. Governments and central banks have to be very careful when they withdraw their financial support, the right timing will be crucial.
Allianz chief economist Michael Heise
Virtually every country has seen its debt rise. Emerging markets such as China, however, face a relatively smaller burden than industrialized countries. Why?
Many emerging markets were better placed compared to industrialized countries before the financial crisis struck. In Asia's case, they had learned their lessons from the Asian crisis of 1997.
Many emerging countries had also managed to build up a substantial financial cushion. Their foreign currency reserves had climbed to unprecedented highs. Most banks in the emerging markets had also avoided the toxic instruments that triggered the crisis in America and Europe.
America is mired in debt. What will be the short and long term impacts of this debt on American policy and its economic development?
If you look at private sector debt, there will be a long period of consolidation. We call this process deleveraging. It will weaken growth but not derail the recovery altogether.
As far as public debt is concerned, a major share of this came from the gigantic effort to get the economy back on its feet as quickly as possible. Nothing would have been worse for the world economy than a prolonged slump in the US.
This strategy has proved to be astonishingly successful. The US economy is getting back into stride faster than the euro area. Real growth there is set to bounce back to 2.9 percent this year.
But it is true the fiscal picture in the US now looks very ugly. This year's deficit is at a staggering 1.4 trillion dollars, that's almost 10 percent of GDP. In the coming years, they will have to get public finances back on to a sustainable footing. This will be a major burden for medium-term growth.
The economic recession has led to a decrease in tax earnings worldwide. Can you already say who is losing most and who is doing relatively well?
Countries like Iceland, Ireland, and the UK that had relied a lot on the financial boom were particularly badly hit. German GDP fell steeply as well, which was mainly due to our reliance on exports, but the impact on tax revenues was relatively muted, thanks in part to the robustness of the labor market.
Can governments compensate for decreasing income or will they have to make budget cuts? What does this spell for social security systems?
In most countries revenues will start recovering this year as the economy gets back into gear. But budget cuts are unavoidable as governments will not be able to compensate for the previous drop in income.
With aging and declining populations in many European countries, there has long been a need to revamp welfare systems and to incentivize people to increase their own savings. The crisis and the resulting strain on public finances have merely made this more urgent.
The WEF speaks about generational debt. Will there be a point where this debt becomes unbearable?
Generational debt is a contentious issue. It is true that towering debt ratios limit a state's ability to act, they inhibit investment, and they could lead to rising tax burdens.
But it is not fair to say that future generations end up footing the bill for our profligacy. What would tomorrow's world have looked like had we not tackled the financial crisis? I don't think it is possible to identify a specific point where debt becomes unbearable. Nonetheless, governments must ensure that debt levels remain manageable.
Greece is among the most prominent victims of this fiscal crisis. How dangerous is its situation for the Eurozone and economic recovery in the EU?
Greece's problems existed beforehand but the crisis has highlighted them. The situation is very serious and I find the threat of contagion worrying. This is certainly the severest test for European Monetary Union so far but the euro itself is not in danger.
In economic terms, Greece is not "systemic", it only accounts for three percent of eurozone GDP. But to calm rattled nerves, a swift solution is what we need right now. More chaos on the financial markets would undermine the nascent economic recovery.
The WEF mentioned the Scandinavian model as a positive example. Can their mixed public-private provision of social services be a model for other countries?
The WEF said social systems in Scandinavia are more effective than others, but they also said that none of them was really designed to meet future needs. In a pay-as-you-go system, a shrinking workforce will simply not be able to finance the needs of an aging population.
What could Allianz offer in such a context?
There is no doubt that debt levels and budgetary constraints mean that generous state welfare systems are a thing of the past. Financial services providers will have to play a greater role. At the same time, consumers have become more cost-savvy and are wary of risk.
Allianz has a reputation for stability and reliability and we are well placed to provide the necessary range of products. One of our many strengths is managing "retirement assets".
This interview was first published on the Allianz Knowledge Partnersite.
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