​by Ludovic Subran, Group Chief Economist


In macroeconomics, we usually speak of second round effects in two fairly specific cases: first, the unfortunately well known wage-price setting, and, second, the (notably very recently) highly controversial public spending multiplier. In reality, any even slightly complex mechanism with medium-term consequences can be seen as a set of second round, third round or nth round effects – but on one condition: that we expect it. And the sovereign debt crisis was, indeed, fairly well signalled ahead.



​From the first budget stimuli that followed the 2008 financial crisis, it became fairly obvious that the lack of selectivity in productive investments, in job creation and in banking system consolidation would harm growth and public finances in the mediumterm. The sovereign debt crisis is, indeed, more complex than what the official story was willing to say, because of its deep roots in an incomplete monetary union, but its consequences, particularly in 2012, are a natural outcome of the (non-) decisions taken in 2011. Also, evidence of this can be seen in the consistency in our forecasts since December 2011, in terms of both economic growth and business insolvencies.
One might imagine some good and bad surprises, whether from the Eurozone or elsewhere, but the uncertainties relate more to the scale of the second round effects and the speed at which they play out – and less on whether they will happen. In the United States, for example, recovery will be sluggish, because job creation has been neglected, and risky, because hyperliquidity will leave scars on asset prices. In Europe, recession will be the order of the day, as austerity – like a double punishment – will also impact on growth in its neighbours.
Faced with the BRICs, the MISTs (Mexico, Indonesia, South Korea and Turkey) and other rising (or already arrived!) powers, the lack of investment to narrow the gap in competitiveness will itself also have many second round effects. One other and particularly disquieting example is the lack of contingency arrangements, at a time when oil price volatility brings back vivid memories in the oil importing countries. Lastly, the delays in taking major decisions on the endangered economies will also have second round effects from 2012: the cost of the solution will be higher, and other chain reactions will be triggered. So it is that 2012 will be a year full of ups and downs, but less uncertain. Indeed, a great deal is already explained by the tone that was set in 2011.