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Ten Surprises for 2005

What could be in store for the global economy in the coming year?

December 23, 2004

What could be in store for the global economy in the coming year?

As you will see, the events sketched below have little, if anything, to do with one another. Some are positive, some negative. Clearly, my list of unexpected developments does not aim to give a consistent overall picture of events in 2005.

The question I am pursuing is not whether something is more or less likely. The point is to stimulate imagination — and to warn against being too certain about the forecasts for the coming year.

Surprise 1. The civil war in Iraq comes to an end. Peace returns to the country. Reconstruction generates a powerful impetus for worldwide growth. Iraq again becomes one of the richest countries in the Middle East. It contributes to peace throughout the region (including Israelis and Palestinians). In America, Secretary of Defense Rumsfeld resigns and President Bush concentrates on domestic policy.

Surprise 2. Growth in China plunges from 9% to 2%. The rapid expansion of the country's economy has led to ever more acute structural imbalances. China's supply of energy and steel proves insufficient. Due to the huge investments of past years, there are overcapacities in other areas, such as housing and construction.

Outside the growth centers in southeastern China, the population is revolting against being disadvantaged. The government is forced to implement large support programs for the countryside which fuel inflation. The Chinese renminbi is not revalued — but devalued.

Surprise 3. In Russia, President Putin becomes ill and has to resign. There is chaos in the streets and a major political fight on who will succeed him. Amidst all this turmoil, the former head of Yukos, Mikhail Khodorkovsky, is released from prison, tries to rebuild his oil empire and launches a presidential campaign inspired by the Orange revolution in Ukraine.

Surprise 4. The North Atlantic Treaty Organisation is dissolved. Both the United States and the European Union feel that they can better serve their own interests by separate military forces. The Europeans are creating a new continental army composed of the military forces of the individual member states.

Surprise 5. The European Constitution takes effect. Tony Blair, previously the British Prime Minister, is elected the first President of the European Union. This gives fresh impetus to the continent’s development.

The Lisbon process — which was intended to make the EU one of the most competitive knowledge-based economies in the world by the end of the decade — is given top priority.

The aim is to have the EU grow faster than the U.S. by 2006. In the UN Security Council, the EU takes over the seat held in the past by France and Great Britain. Germany withdraws its application for a seat.

Surprise 6. The oil price falls to $25 per barrel. Many new production facilities — unprofitable until now — are put into operation. Due to weaker global growth, the additional supply encounters weak demand.

The major industrial countries build up their strategic reserves in order to prevent a sharp decline in the oil price. Plans for new coal-fired power plants or resumption of atomic energy are put on the back burner.

Surprise 7. In the United States, Congress initiates a constitutional amendment process that prohibits the federal government from running a fiscal deficit. The full responsibility for counter-cyclical policy now lies with the Federal Reserve.

The term for Federal Reserve chairmen is also altered with immediate effect, and is now identical to the lifelong service term of the U.S. Supreme Court. Alan Greenspan, whose term was to have expired in early 2006, stays in office.

Surprise 8. In Germany, Europe's largest — but also often most sluggish — economy, responsibilities of the federal and state government will be reallocated and a majority voting system is introduced.

This means the end of coalition governments, so the ability to implement political reforms improves. The retirement age is raised to 70. The health care system undergoes radical reform — and the tax system is drastically streamlined.

Germany becomes a low-tax country in the EU. Funds from abroad will flow back to Germany. EU member states from Central and Eastern Europe demand that Germany raise its taxes.

Surprise 9. The foreign exchange markets lose confidence in the euro. At the end of 2005, the euro stands at $1.04. President Bush imposes punitive duties on European suppliers to prevent the American current-account shortfall from getting too large at this rate. American airlines are forbidden to buy airplanes from Airbus.

Surprise 10. A leading U.S.-based global industrial or financial company goes bankrupt. This destroys the markets’ confidence in a continuation of the positive trend of the economy. It disorients the financial markets and stock prices plunge. Corporate bond prices around the world take a fall. The Fed lowers interest rates. Unemployment rises.

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