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The Globe and Mail

Where is global growth without U.S., Europe, Japan?

Illuminated euro sign in front of the Frankfurt headquarters of the European Central Bank, which announces its interest rate decision Thursday.


It is getting harder and harder to see where tomorrow's global growth will be coming from. Job creation in the U.S. has come to a screeching halt. Growth in the euro zone has done the same. And a still irradiating Japanese economy continues to stagnate, while an emerging energy crisis has suddenly sparked plans to start off-shoring manufacturing.

You can say all you want about the importance of China, India and Brazil as the new engines of global economic growth but how fast can the global economy be growing if none of the world's most developed economies are part of the process? Even worse, the noose is tightening around those economies' necks as their governments run out of policy rope.

In the U.S., it seems everyone other than President Barack Obama realizes that further fiscal stimulus is out of the question. The real policy choice is how aggressively to apply the fiscal brakes and rein in Washington's record deficit. And even that decision is more likely to be made by America's foreign creditors such as the People's Bank of China than by a new administration or Congress.

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Without the wherewithal for further fiscal stimulus, the Federal Reserve Board will prime its printing presses for a third, and quite likely, fourth round of quantitative easing. If nothing else, those measures will push the U.S. dollar to new lows.

Unlike export-based economies such as Canada or Germany, the U.S. export sector is much too small in relation to the size of the economy to single handedly carry the burden for growth. Quantitative easing may not even be able to offset the impact of the fiscal brakes that inevitably have to be applied.

Meanwhile, the European Monetary Union, at least the 17-member version we know, will soon be abandoned as a wrong turn in post-war European history. The tolerance of the German taxpayer these days is running about as low as the liquidity of the Greek government bond market. Germans are even challenging their government's constitutional right to bail out another country in their court system. Most Germans thought bailing out East Germany was enough for a lifetime.

Meanwhile, Greece, a serial defaulter, will do what it does best, which is, of course, to default. But unlike Greece's many past defaults, this default will reverberate through the 17-member monetary union, shaking more than a few bad apples off the tree. Interconnected financial markets will see to that in a hurry.

The Germans will lose their obligation to bail out foreign, fiscally wayward states like Greece. But without the PIIGS to plague the euro, the Germans will also lose their cheap currency. As the world's second largest exporter behind China, a cheap currency is a lot more important to the German economy than it is to the American economy.

Anyway you cut it, the outlook for the German and U.S. economies is going from bad to worse.

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