Financial Freefall

On Jan. 5 this year, 74-year-old Adolf Merckle, one of Germany’s wealthiest businessmen, was found dead on the railroad tracks in Baden-Württemberg, Germany, in what would later be confirmed as a suicide.

Merckle took his life not because he had lost his fortune set in his family’s assets in the pharmaceutical and cement industries. He took his life because of uncertainties caused by speculative investments and what family members said was helplessness in handling the financial crisis.

This is a story of our time, indicative of the nature of the recent crisis. It’s illusiveness seems to be confirmed by the media’s inability to paint a clear picture of what has gone wrong. While the world struggles to make sense of why the heart and lung of the capitalist system are collapsing around them, previously reliable media sources, like the Economist have lost clout, clinging to a free market ideology while simultaneously calling for governments to bail out the same system they claimed worked best with no outside involvement.

Other publications – too stubborn to admit they had been wrong – didn’t truly grasp what had happened. Simply trading one ideology for another seemed redundant in a time that obviously needed practical solutions.

And now, understanding the vast complexities of the financial system appears to be losing importance, as the real effects of the crisis took hold. More than 2.5 million Americans lost their jobs last year, more than in any year since 1945, and the unemployment rate climbed to 7.2 percent – this percentage not including those who have stopped looking for work or are employed part-time.

What began as work hour reductions and hiring freezes in the real estate and banking sectors has now turned to massive layoffs in nearly every sector of the U.S. economy. Microsoft, which has come to represent the American company, announced its first layoffs ever in mid-January. More than 66,000 Americans lost their jobs in retail in December – normally considered the best month of the year for that sector.

Economists’ most optimistic prognoses see the U.S. economy continuing shrinking at least through July, which would confirm fears that this is, in fact, is the longest recession since the Great Depression, beating the stagflation-induced downturn of the mid-1970s. And this is the situation in America, where much of the world expects the biggest recession to take place.

But this expectation may be false. According to the most recent reports from Bloomberg, European consumer confidence will fall for a fourth month in January as job insecurity caused average European citizens to become more conservative. Retail sales across the EU declined for eighth month in a row.

As this newspaper went to print, the International Monetary Fund had just reported updated projections for the world’s economies. The U.S. economy, it claimed, would shrink by 1.6 percent in 2009, a much sharper decline than previously projected. But the most striking part of the report was that Europe is now expected to experience slower future growth than the U.S – even though many still perceive the current crisis to be "made in America." Eurozone countries of the EU will see their economies shrink by two percent per year, according to the outlook and the forecasts for Eastern European economies were reduced most.

All together, the IMF puts world growth rates at the lowest levels since World War II. Chief IMF Economist Olivier Blanchard went as far as to claim that they "now expect the global economy to come to a virtual halt." Those responsible for the report continued to stress the need for strong international policies to combat the structure and reemphasized the need to recapitalize and restructure banks and "unclog" credit markets, but otherwise have little good news and few recommendations on how to weather the oncoming storm.

Though the effects in Austria may still be somewhat indiscernible to an untrained eye, effects may be closer to home than many believe. In neighboring Germany, the number of jobless has risen twice as much as what was predicted in January and increased to nearly 3.5 million according to a report from the German Labor Agency. Three-hundred-and-eighty-seven-thousand more Germans lost their jobs since December 2008, bringing the total to 8.3% according to the Bundesagentur fuer Arbeit.

Reports from Austria remain rather indecisive, claiming only an 8.2% increase in unemployment since this time last year. The Austrian equivalent to the German Bundesagentur fuer Arbeit, the AMS, has yet to come out with their latest unemployment rate. Data from Eurostat, however, gave a clearer idea of what was to be expected. Their prognosis, too, has been revised; the outlook for Europe is bleak, and recent reports predict that Austrian unemployment will increase to 4.3% for 2009 and 4.5% for 2010.

But these are only current projections, and the common trend is that this will be reduced downwards yet again. Frankfurt economist Rainer Guntermann recently told Bloomberg News that he expected German unemployment to rise as high as nine percent by 2010. German companies are also implementing the shortened-shift strategy to save costs, but layoffs have become inevitable as the export-driven economy is affected by downturns elsewhere.  Austria may follow in its neighbor’s footsteps: The General Motors factory in Aspern, Lower Austria, plans to reduce 83% of its 1,850 workers to a part-time basis until May.

And to Austria’s east, Hungary and Romania have been next in line to seek aid from the European Commission or take measures to combat what is now commonly believed to a severe downturn. The Czech Republic is also acknowledging the problem as consumer demand from Western Europe continues to decline. A range of Eastern European countries, including Latvia, have already sought assistance from the EU or the IMF. The number of part-time workers in Austria rose to almost 15,000 – up from 9,000 – since last December bringing the number of part-time workers to one of its highest rate in 10 years.

How the trend will continue – in Austria, the U.S. and beyond – remains to be seen. As with the illusiveness of the early stages of the crisis, prospects for the future seem equally difficult to define.

The only thing that appears certain, based on these recent developments, is that the trend will continue downwards. In an interview published in Der Standard on Jan. 29, financial expert and philanthropist George Soros claimed that the crisis had proven to be much worse than even he had expected – and his early predictions were quite bleak. The world may need to brace for the worst.