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People's Daily Online>>Opinion

Reform vital to future of global economy

By Zhong Sheng (People's Daily)

07:59, December 07, 2011

Edited and translated by People's Daily Online

How long will the world economic troubles last? More and more economists are expecting the recovery to be a drawn out process that may last for years.

Since the international financial crisis broke out in 2008, the world economy has been able to see the light at the end of the tunnel, but it still seems distant. Right now, there has been no rallying point for recovery, and new crises continue to emerge.

It seems that the world economy has returned to square one after a massive monetary and fiscal stimulation. Data from the International Monetary Fund shows that the proportion of financial deficit of world economies to the global output rose 15 percent on average, and the world's public debt increased approximately 15.3 trillion U.S. dollars from 2007 to 2010. Huge debts have led to the concentrated outbreak of sovereign debt crisis in many developed countries.

It is even worse that the sovereign debt has severely damaged the real economy of developed countries. The economic contraction has resulted in the further deterioration of balance sheets of the government and the private sector, and various countries are forced to start the de-leveraging process.

However, the de-leveraging effect will further contract the balance sheet of various sectors; decreased market liquidity will cause insufficient confidence in investment; magnified capital premium risk will greatly reduce credit capacity and make the economy slump through the investment multiplier.

To curb the slowdown in economic recovery, various countries have strengthened crisis intervention, leading to continuous expansion of fiscal deficits and government debts. Such a vicious cycle indicates that the debt-dependent economy of developed countries has come to an end.

Another prominent characteristic of this round of economic downturn is that political factors have a greater effect on economic decision-making. In Europe, the design flaws of the European Union and euro zone systems are closely intertwined with the debt crisis. In the United States, the debate over deficit reduction program has evolved into a political battle on Capitol Hill.

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