The B3 – The new face of globalization? 2

Markus Jaeger makes an interesting observation in his article The Great Risk Shift[1] noting that the Great Recession has had another unexpected outcome.

In summary, the terms “developed economies” and “emerging economies” are now anachronisms – part of the vocabulary of the pre-Great Recession world that are now of limited value. Jaegar’s main point is that the by-product of the Great Recession has been to produce new economic groups – or blocs – each with different risks that are yet to be fully recognised. The so-called emerging economies (that we should really re-label as the emerged economies), have now demonstrated their fiscal stability and therefore present a reduced risk of a sovereign debt default. However such economies do, the article observes, still face political risks.

Critically, a sub-group of the “developed economies” (most notably the so-called PIIGS[2]), have emerged with an increased debt burden.

So, looking towards the future shape of the economic world, we could be concerned with three blocs (the B3 in the title):

Bloc #1 as I will call it, represents those developed economies that have weathered the storm with, for the time being, their credit risk profiles intact. Obvious members of this category include Germany, US and France.

Bloc #2 represents the emerged, and now in most cases, decoupled economies of China, Russia, Brazil and South Korea that have come through with generally low government debt to GDP ratios.

Bloc #3 is a new club with a potentially expanding membership. These are the former developed economies that have fared the worst and come out of the recession with increased debt levels. These countries face a challenging future and could be, in relative terms, in long-term decline. There may be other “developed economies” that could join this club.

Jaeger suggests that each bloc faces different risks.

Arguably Bloc #1 is best positioned, followed by Bloc #2 where political risk replaces the declining risk of sovereign debt default.

Bloc #3 is the most interesting in view of increased debt levels. In future postings I will argue that in certain scenarios these countries could face volatility on the political front too.

Certainly, the “bloc” concept is an interesting way to perceive where the power to reshape the global economy will come from as it focuses upon potential groups of influence rather than individual countries. In the new post-Great Recession world, “countries” too could become an anachronistic term when considering where power really lies.

[1] M. Jaeger, “The “Great Risk Shift” – or why it may be time to re-think the developed-/emerging-markets distinction. See Illustration for the G3.,” DB Research: Talking Point, Mar. 2010.
[2] Portugal, Italy, Ireland, Greece, Spain.

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