Hamish McRae: Calm down Mervyn – this so-called global recession is really not that bad

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The Independent Online

It is about as alarmist as you can get. Sir Mervyn King, governor of the Bank of England, says: "This it the most serious financial crisis we have seen, at least since the 1930s, if not ever."

Ever? And anyway, is this sort of stuff a central banker should be saying? It is hard to imagine his predecessor, the late Eddie George, going in for this sort of hyperbole. But that is what the governor said and it deserves attention.

There are certainly a host of differences between now and the 1930s. One is that this is a period of global inflation, not deflation. Another is that the emerging world is still growing strongly – indeed, the so-called global recession was actually only in the developed countries, for the emerging world as a whole continued to grow. Thanks in part to those countries, world trade has recovered strongly. Another difference is that there has been no widespread collapse of the international banking system, though it did come close to that after the failure of Lehman Brothers. But perhaps the biggest difference is that the hatreds which existed then, the legacy of what was then called the Great War, do not exist today.

There is also a case to be made that the financial crisis of the 1970s was more serious than this one, for inflation and interest rates reached the teens in most developed countries. It seemed for a while that the social and commercial structure of the developed world would be destroyed by hyper-inflation. In Britain, inflation peaked at 25 per cent in 1975.

The general expectation now is that Germany and France may well experience mild recessions with some fringe countries having deeper ones. But the world economy is still expected to grow by more than 3 per cent and from a more parochial point of view Britain is also forecast to grow, albeit slowly.

So why the alarm? Well, we can only assume the governor is worried European politicians will fail to contain what markets now see as the inevitable Greek default. Taken in isolation, this should not be a catastrophe. European banks which hold Greek debt will be under pressure and some may need to be bailed out. But the numbers are not huge in the totality of Europe's economy or the resources of its two strongest countries, Germany and France.

The danger would be if a Greek default triggered a domino collapse of other and much larger bond markets, with a sequential collapse of the sovereign debt of Spain and Italy. Were that to happen – and it lead presumably to a break-up of the eurozone itself – then maybe it would qualify as "the most serious financial crisis we have seen, at least since the 1930s". It is hard to see any other circumstances that would justify such language.

It may well be that some countries will eventually have to abandon the euro. But in the short-term it should be possible to contain the pressures, assuming Germany and France co-operate and do so. Maybe the governor fears they won't.

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