In fact, it is hard to find another episode where the developed world suffered a severe recession that was not magnified in developing countries. This is especially relevant in Latin America (figure 2). The developed economies face a different scenario. They are having important doubts about whether their fiscal situation will be sustainable. Large expansions of fiscal expenditure before the crisis and the implementation of unprecedented stimulus packages to cope with it threw their debt levels very high. Today they have no further room to continue increasing public spending and, even worse, they need to make substantial adjustments that are difficult to implement in such a weak economic situation. The cases of the United States and Japan are good examples. Add to this what is happening in peripheral European economies, the adjustments that are needed and the financial tensions this creates. What the founders of the euro had in mind early on was that the economies in Europe, particularly in the south, would adopt sound macroeconomic policies following in the steps of Germany. Nonetheless, it seems that some economies, such as Greece, only took advantage of the low risk premiums, over-borrowing and creating a deficit way bigger than set forth in the Stability and Growth Pact. The consequence was extreme financial vulnerability that is proving very difficult to resolve today. For the time being, risks seem to be well contained, but the lack of credibility of the markets has resulted in some agents speculating with the possibility of some member country being discharged from the Eurozone.
This time around, the US strongly increased fiscal expenditure and borrowing, which was used to finance the purchase of overpriced housing. As we now know, and warned insistently before the crisis burst, this mix was bound to lead to severe adjustments, sooner or later. High terms of trade, capital inflows and growth rates have resulted in exchange rate appreciations in most emerging and oil-exporting economies (figure 5). In real terms, the current level of the exchange rate is at its lowest in the past decade in most emerging economies (figure 6). Vigorous economic growth in these economies means also strong currencies, while the opposite is true in developed countries. As I said before, the high indebtedness of developed economies holds back domestic demand growth. Meanwhile, in emerging economies domestic demand growth is thwarted by constraints in domestic supply, which require redirecting purchases towards imported goods. The adjustment of the global economy calls for a change in demand composition, and the exchange rate adjustments works in that direction. It is logical to expect that once the developed economies recover their strength, their currencies will follow suit. The transition may take some time, however. Although the adjustment is good for the world economy, it entails tensions that may require exceptional policies. Thus, several emerging economies, Chile included, have taken action to moderate the exchange rate adjustment.