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Global Economy at Risk: OECD

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According to the Organization for Economic Cooperation and Development (OECD), the euro zone debt crisis threatens not just Europe, but the world economy itself. And as Germany and France prepared to defend seemingly opposite positions at a European Union summit later this week, the chairman of India’s largest retailer of diamonds and gold jewelry looked to expand in Asia, pointing out that even in tough times many regard diamonds as a hedge.

Bloomberg reported Tuesday that in its semiannual report on the global economy, the OECD issued a warning to E.U. leaders in its commentsbefore a meeting Wednesday in Brussels. OECD chief economist Pier Carlo Padoan wrote in the report, “The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth.”

He added that such events “may materialize and spill over outside the euro area with very serious consequences for the global economy.” Padoan acknowledged lower predictions of growth that presage continuing economic difficulties; the OECD has revised downward its earlier predictions in November of 0.2% growth for 2012 and 1.4% for 2013, instead foreseeing a shrinkage of 0.1% for 2012 and expansion of only 0.9% for the coming year.

In the report, Padoan said, “Such persistent weakness reflects underlying economic, fiscal and financial imbalances within the euro area, which have been the root cause of this crisis and barely begun to unwind. Recovery in healthier countries, while welcome, is not strong enough to offset flat or negative growth elsewhere.”

He went on to say that it was necessary to take steps to tamp down market turmoil, and advocated monetary easing as well as continued bond buying by the European Central Bank (ECB) for that purpose, warning that otherwise sovereign bond market volatility “could have repercussions for the stability of the banking system and ultimately public finances.”

On everyone’s mind, of course, is the situation in Greece, where the political parties committed to the requirements of the country’s bailout, New Democracy and PASOK, are finding themselves upstaged by a surge in popular support for parties, led by Syriza, advocating an overthrow of austerity conditions while still seeking to remain in the euro.

New elections scheduled for June 17 will test voters’ resolve in either case as a war of words continues among the party leaders. Should troubles escalate in Greece, the fear is that fiscal woes will spread to Spain and Italy, both with their own financial challenges.

The OECD is sensitive to the rebellion against harsh austerity in Greece and in elections elsewhere. Acknowledging that austerity was wearing on the countries on which it was imposed, the report said, “Tolerance for fiscal adjustment may be reaching its limit. With recession in a number of countries in 2012 and 2013, a combination of enduring financial fragility, rising unemployment and social pain may spark political contagion and adverse market reaction.”

The OECD also called for austerity measures to be “as growth-friendly as possible” to avoid adding to the risks already present in the situation. It said, “much can be gained in efficiency of public spending and through a composition of taxation that is least harmful to growth.”

And therein lies the rub, with growth pitted against austerity. Sparks are sure to fly at the Brussels gathering of E.U. leaders, with Chancellor Angela Merkel of Germany on the austerity side of the debate and President Francois Hollande of France espousing growth policies on the other.

Merkel plans to oppose Hollande’s position, and was quoted saying at the NATO meeting in Chicago that good cooperation “doesn’t exclude differing positions.” She added, “These may very well arise in the context of the European discussions.”

Hollande, on the other hand, isn’t backing down, although he appears to be avoiding a confrontational approach—at least for now. He intends not only to push for growth and stimulus spending policies at the E.U. leaders’ meeting on Wednesday but also to propose joint euro bonds—something else Merkel has been firmly opposed to from its first mention.

“Everything will be on the table,” Hollande was quoted saying. “All the tools, all the proposals will be welcomed and I am not preparing this informal summit with my government to create conflict.” He also stepped away from a preconference discussion of euro bonds “because I don’t want to anger anyone before we talk about it directly on Wednesday.”

Merkel, for her part, did not elaborate on potential points of disagreement with Hollande, and was quoted saying, “The point is to find sensible solutions. That’s how I work and that’s also the feeling I got from the French president.”

Even as Europe reels under the weight of the debt crisis, Mehul Choksi, chairman and managing director of Gitanjali Gems, the largest retailer of diamond and gold jewelry in India by sales, is planning expansion on a grand scale, envisioning Gitanjali as one day being mentioned in the same breath as Cartier and Louis Vuitton.

With more than 70 brands and 4,000 retail outlets across the globe, Gitanjali has already grown substantially, and Choksi sees a bright horizon of additional growth thanks to rising consumer classes in his native India and in China, where demand for luxury goods, and gold and diamonds in particular, has swelled along with incomes. He was quoted saying, “The largest luxury player will emerge to be in India and China in five to 10 years’ time, and certainly we will attempt to be one.” He has some tough competition. Not only U.S.-based Tiffany & Co. (TIF) but also London-based Graff Diamonds (which only Friday was reported by The New York Times to be planning a $1 billion IPO in Hong Kong) and Chow Tai Fook Jewellery Group, based in Hong Kong, are seeking to expand in the Asian market. China and India by themselves account for some 55% of the worldwide demand for gold jewelry, and Choksi says that diamonds will beat gold as an investment.

He may be right. According to the London-based World Gold Council, China will outdo India as the largest consumer market for gold in the world some time in 2012. Not to be outdone, the Antwerp World Diamond Center said in February that China could also unseat the U.S., currently the world’s largest market for diamonds, by 2015. With luxury goods in high demand in China, and in India as well, those markets appear ripe for expansion.

Slowing economic expansion in both countries does not appear to unduly concern Choksi, who was quoted saying, “Jewelry is like alcohol. In good times it works because it’s a celebration. In bad times it works because it’s a hedge against inflation; it’s a hedge against bad times.”

Graff appears to agree with Choksi. One of the people familiar with its proposed Hong Kong IPO was quoted saying, “In a time of political, if you like, turbulence, the appeal of having vast wealth concentrated in a two-inch-diameter cube has its appeal as well.”


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