World Economic Update

World Economic Update

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Global markets have been wracked by uncertainty since the onslaught of Europe's debt crisis. Speaking at a June 3 World Economic Update at the Council on Foreign Relations, JP Morgan's Joyce Chang said markets remained restless even after the EU's $1 billion bailout for eurozone countries. Investors continue to await bolder, more unified moves from European policymakers, such as recapitalizing cash-strapped European banks and conducting stress tests.

Bank of America's Mickey Levy said insolvency--rather than illiquidity--is the greater concern for Europe, particularly Greece. The EU's bailout package is only a temporary measure that "kicks the can down the road" for Greece, allowing it and other fiscally shaky eurozone countries to roll over their sovereign debt until the European Central Bank steps in to buy it. But unlike in the United States, where the Federal Reserve became banks' sole financial backstop, the ECB will be hard-pressed to unify twenty-seven member countries, particularly Germany.

Turning to the United States, Barclays chief U.S. economist Dean Maki said although a strong cyclical recovery is underway, longer-term structural problems will eventually set back the country's economic growth. Levy believes the new natural unemployment rate is 7 percent, up from 5 percent a few years ago. This is because 1) labor participation is falling as baby boomers exit the work force, 2) the housing recession has slowed down labor mobility, and 3) the unemployed are choosing extended unemployment benefits over lower-paying job offers.

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