In an interview with the Huffington Post, Marcello Messori – economist, director of the Luiss School of European Political Economy and president of the Italian State Railways – explains the reasons for the Black Monday that began in Shanghai and Shenzhen, where the two main Chinese markets dragged down the European and American stock market indices and warns: “The European growth rate was driven more by exports than by domestic consumption. It is no coincidence that one of the countries most affected from a stock market point of view was Germany, which has an extremely large current account surplus compared to areas outside the euro area. And this partly applies to Italy as well. We will not be the most affected state, but certainly the little growth we have experienced and the reduction in the recorded recession are both due to exports”.
Messori argues that "the Chinese locomotive has stalled because it has tried, first among the major world economic areas, to move from a situation of strong support for growth on the part of the public - which in this case took the form of a highly centralized intervention on the part of the state-controlled Central Bank of China – to a boost in domestic consumption. In short, an attempt at economic decentralization has been made. This step was very difficult."
This is why "the devaluation of the yuan should be read as an acknowledgment that this transition from growth driven solely by investments to growth also supported by domestic consumption was much more problematic than previously thought".
What will therefore be the consequences of the Chinese move for Europe? According to Messori, “the euro area is certainly affected by the slowdown in China and that of the emerging countries because the European growth rate was driven more by exports than by domestic consumption. And therefore it is no coincidence that one of the countries most affected from a stock market point of view was Germany, which has an extremely large current account surplus with respect to areas outside the eurozone. And this is partly true for Italy as well. All economic systems with modest export-driven growth are at risk of being affected by this crisis”.
The Fed will also greatly affect the future of the economy and this is why, according to Messori, “in the short term it would be positive if it does not raise rates, it would be a boost to international growth and a barrier to a possible recession. In the medium and long term there would be the risk of recreating financial bubbles. This is the narrow passage in which the Fed finds itself: don't raise rates too soon compared to a situation that was perhaps unexpected at the beginning of 2015, but don't delay them so much as to create an irreversible bubble”.
