The European Central Bank looms large over the Euro debt crisis. Photo: soumit (flickr)

As Europe attempts to thwart a broader global recession, it is facing what many economists refer to as a trilemma, and poorer countries could be the victims.

A financial trilemma is comprised of three goals that policy makers try to achieve: (1) a stable/fixed exchange rate; (2) an economy open to international flows of capital; and (3) a sound monetary policy to stabilize the economy.

Here's the catch: In reality you can only achieve two of these goals, not all three.

In 1999, the Eurozone decided to give up the third goal, independent monetary policy. In exchange, they enjoy a common currency across 17 member nations and the freedom to exchange money and goods across borders. Though the European Central Bank creates monetary and fiscal policy for the European Union, each member nation relinquishes its own control.

This becomes an issue when a country gets into financial trouble and must defer to the European Central Bank or greater European Union. This was recently evidenced with the bailout and continuing debt problems in Greece.

Potential for problems arise due to our ever globalized, interconnected world. Eurozone policies are far-reaching, extending their grasp to neighboring emerging markets dependent on foreign dollars. With austerity measures becoming the norm, lenders are avoiding risk and could cut foreign lending in favor of keeping business in their own backyard. The Economist references a speech by the Financial Stability Board head, Mark Carney, in which he warned about the damage if the European bank were to deleverage on the world economy.

Many emerging economies in Eastern Europe depend on both foreign aid and outside investment. If the Eurozone's financial well runs dry the effect will ripple throughout Eastern Europe, even the U.S. Poorer E.U. members worry that they'll emerge the victims. French president Nicolas Sarkozy rocked the political world after his comments at a University of Strasbourg debate on November 8, where he described a proposal for a two-speed Europe, presumably divided between richer and poorer nations.

What part does the European Central Bank (ECB) play in this? That’s the question everyone is asking. Similar to the U.S. Federal Reserve, the ECB has the power and leverage to swoop in and bail out E.U. members on the brink of collapse. They are hesitating, however. Germany feels the ECB should step in only as a last resort. Many policymakers in Germany believe that the current crisis is forcing reform and thus serving a purpose, as recently expressed in The New York Times.

With optimism waning on debt solutions for the U.S. and abroad, tensions mount and consensus becomes imperative. Politics need to be set aside before any sort of real dialogue can exist. Will the E.U. decide on a two-speed Europe? Will any countries abandon the Euro? The implications for emerging markets are considerable; several outcomes could result in global recession.

A golden parachute for all. Photo: John Kannenberg (flickr)

"Too big to fail." We’ve all heard it. It’s why the U.S. government bailed out some the world’s largest banks in 2008. And the largest U.S. automakers in 2009. But where did we get this idea that our governments can and should bail out private companies in a free market? Here's how the seeds were planted more than 70 years ago that made bailouts not just legal, but seemingly essential.

We’ve split up our thoughts into four acts:

Act 1: The battle over the lessons of the Great Depression.
Act 2: The first bailout leads to the next, and the next.
Act 3: The value and perils of deregulation.
Act 4: Banking crises go global.

Here is a very encouraging story from Newsweek about social entrepreneurship and the kind of change that is possible when thinking outside of the box. The story highlights the innovative work of José Roberto Fonseca that is revitalizing the agricultural sector in one of the poorest districts in Brazil. Using a combination of solar energy and a process known as hydroponics, José has been able to create sustainable solutions for agricultural problems that inundate this arid region of Brazil.

But where others saw privation, Fonseca saw opportunity. "Poor people in the sertão have been farming beans, manioc and corn the same way they have since Brazil was discovered, and poverty is as bad as ever," he says, waving at the monotonous expanse of balding scrub and cactus. "It's time they tried something different."

Finally, there is an upbeat news piece about Africa. The BBC released a brief story on Jan. 31st about the opening of a stock market in Rwanda. For a country that has known its share of sorrow, this is one more element that can direct Rwanda toward a more hopeful future.

Upon opening the Rwanda Capital Market, President Paul Kagame described it as a milestone for the nation. The hope is that the exchange will aid the economy, which has yet to bounce back after the 1994 genocide.

Most assume that China will experience a significant downturn in growth as a result of the recent scare in the US economy. But on January 3rd The Economist published an article suggesting that growth of GDP in China is less dependent on the export of cheap goods to Western consumer markets.

The headline ratio of exports to GDP is very misleading. It compares apples and oranges: exports are measured as gross revenue while GDP is measured in value-added terms…
Once these adjustments are made, Mr Anderson reckons that the "true" export share is just under 10% of GDP. That makes China slightly more exposed to exports than Japan, but nowhere near as export-led as Taiwan or Singapore.

Today an International Herald Tribune article asks, "is economic history about to change course?" As power transfers from the west to the east, many economists are worried about a protectionist backlash by governments in attempt to regain control.

"Economic theory tells us that globalization is a win-win, but it isn't, at least not in the West," Roach said. "The theory was written for another era. We have to ask some hard questions about unfettered capitalism. We need a new script."

The risk is that Western governments, mindful of the growing backlash among voters, will be tempted to rewrite the script by engaging in old and new forms of protectionism.

Many are predicting 2008 to be a year for the economic history books.

The Council on Foreign Relations takes a look at the possibility of a global recession.

As many indices mark the worst stock market losses since 9/11, India suspends trading and Japan marks the worst two-day losses in 17 years, analysts are talking global recession (and its implications for the US).

The Council on Foreign Relations' Lee Hudson Teslik says that this recession (or mild economic turn down) could have implications for a number of US policies, ranging from immigration to possibly increasingly protectionist economic policies as US job losses cause citizens to feel the squeeze-- and subsequently pressure politicians.

However, can emerging markets counterbalance the fear and uncertainty present in the US and across Asia?

Globally, economists see a silver lining in the developing world. Emerging markets in East Asia, the Middle East, Latin America, Eastern Europe, and even Africa have seen rapid recent growth (Economist),
and analysts hope growing consumption in these regions might offset declines in the United States. Either way, analyst Zakaria and others argue, a downturn need not bring a permanent loss of power for Washington, if policymakers reclaim the “open and expansive” attitude with which they once embraced the world.