The shockwave of financial crisis which began in Thailand on 2 July 1997 appears to hang suspended. This, however, is an illusion. It is far from over.

Globalisation of the world economy has created an interdependence between national economies, and the knock-on effects of crisis are therefore that much greater.

The collapse of currencies in the Asian crisis, and the subsequent economic disaster that hit countries such as Indonesia, was followed by two further developments : the 17 August 1998 devaluation of the Russian rouble, and then, in January 1999, that of the Brazilian real (see Michel Chossudovsky’s article).

One half of the world’s economic system is in crisis.

What are the chances of the other half (which includes the European Union) escaping the contagion ?

Where will the domino effect strike next ?

For the moment all eyes are set on China, particularly since Japan’s decision to devalue its currency in the face of threatening recession.

The lowering of the value of the yen has had a destabilising effect throughout the region and has led automatically to an over-valuation of China’s currency, the yuan. Sooner or later this will force Beijing to devalue, despite repeated promises to the contrary from Prime Minister Zhu Rongji.

The decline in the yen is having a negative impact on Chinese exports.

Japan is a major trade outlet for Beijing - it takes a quarter of China’s exports, and those exports are now threatened by cheaper products coming from other Asian countries.

China’s exports, 60% of which go to other Asian countries, were already down by 9.2% in 1998, and this poses a serious threat to growth.

For 20 years China’s growth rates have been above 10% ; in 1998 according to official figures they fell below 8%, and were actually lower than 5%.

As for foreign direct investment, in 1998 this saw a fall of 25%.

To this we have to add the effects of the restructuring currently under way in China’s state industries which has translated into mass sackings. (Incidentally, the figures show that in this "communist" country, the gap between rich and poor is comparatively greater than in the United States). Thirty million urban wage earners have lost their jobs, and in the countryside 160 million peasants are reckoned to be "surplus".

The authorities are meanwhile discovering that trying to build capitalism without democracy is a high-risk strategy - China’s endemic corruption and nepotism are fanning the flames of popular discontent.

Job creation is not proceeding fast enough to absorb the new waves of unemployed, and this has spurred the government to a voluntarist attempt at relaunching economic growth via massive increases in public spending ($1,000 billion to be spent by the year 2001).

The people of China, however, are understandably nervous, and this has led to an increase in saving and a marked reduction in consumption.

Retail sales are falling, the real estate bubble has burst, bankruptcies and closures are reported on all sides, and deflation is the order of the day (prices fell by 1.5% last year).

Despite China’s foreign exchange controls, capital flight is reckoned to have cost the country $30 billion in 1998.

Furthermore, as in Japan, the banking system is staggering under the burden of bad debt (reckoned to stand at 25% of total lending).

There have been bank failures, such as the collapse in October 1998 of the Guangdong International Trust and Investment Corporation (Gitic), a showcase of capitalism in Canton, China’s richest province.

The rot of bad lending practices has also set in at 240 similar establishments (Itics) which are now the object of scrutiny by the major ratings agencies, Standard & Poor’s and Moody’s.

Of course, the fact that its currency is only partly convertible protects China from speculation.

But in a year that will see, in June, the 10th anniversary of the Tiananmen Square massacre and, in October, the 50th anniversary of the founding of the communist regime, it is quite likely that we shall also see a devaluation of the yuan.

This would threaten the Hong Kong dollar (the value of which is now pegged to the US dollar), and could set off a new spiral of devaluation in the region as a whole, thereby threatening the overall equilibrium of several of the world’s key economic regions.

And China is not the only domino about to fall.

There is also the extremely worrying situation of the United States, currently the motor of the world economy.

The slowdown of economic activity in Asia, and particularly in Latin America where Washington sends 20% of its exports, is potentially very alarming.

Last autumn, as he was intervening the save the Long Term Credit Management investment fund, Alan Greenspan, president of the Federal Reserve - who had been heard denouncing the "irrational exuberance" of the markets when the New York Stock Exchange index was approaching the 6,500 mark - lowered interest rates in order to give the banks a whiff of oxygen.

This fired up the Stock Exchange and sent the index soaring up to the 10,000 mark.

The effect of this is to give Americans the impression that they are getting rich without getting out of bed.

America is no longer saving and is running up levels of debt that some would consider unreasonable.

At a time when industrial investment is slowing down, the country is importing massively : in 1999 its trade deficit is likely to exceed $200 billion.

And its foreign debt is currently up around $2,000 billion.

It has been estimated that the New York Stock Exchange, fired by cheap money, is 25% over-valued.

A fall in the value of the dollar is considered highly probable.

Some analysts are explicitly predicting a crash on Wall Street.

How will all this affect the economies of the world, particularly those of the European Union ?

What are our chances of escaping a vicious circle of generalised deflation —or world recession ?