After the credit crunch, what next for the world?

The financial crisis spells the drastic decline of the complex money-making instruments that have flourished in the boom years. Few of the hedge funds, the private equity funds, derivatives issuers or derivatives insurers that grew so rapidly from the early 1990s can hope to make a healthy recovery. Not by 2010, nor by 2015, for that matter. Many of the firms will simply disappear.

The private equity industry - when a firm buys out public companies, takes them away from shareholders' expectation of immediate reward and manages them privately on a long-term basis - will suffer the least. That isn't to say that the sector, which is scattered from Texas to Sweden, isn't shrinking: many of the firms are now suffering because they grew too quickly and paid too much for the companies they bought, simply because they had to invest their clients' funds.

Hedge funds, concentrated in New York and London, will be much worse off. These unregulated businesses were enormously profitable, but only as long as the market kept rising. Two years ago, the industry had holdings of well over $1 trillion, but the recent chaos has proved disastrous. The value of these unregulated funds is now 35-40 per cent lower than it was in October 2007. Some have already closed, many more will follow.

London, disproportionately dominated by its financial centre, will suffer the most

Derivatives, the instruments that allowed Nick Leeson to bankrupt Barings, started in Roman times when traders first promised to deliver commodities for a fixed price at a fixed date in the future in exchange for a premium. But they lately ballooned into far more complex financial instruments, far removed from simple risk-sharing, that were themselves swapped, with astronomic total nominal values in the trillions even when the actual cash that finally moved was in the millions. Most of the business is in New York and London, and it will shrink very severely. Only a fraction will survive, because there will always be a demand for risk-sharing: airlines, for example, will still want to buy fuel at predictable prices.

It isn't just complicated financial industries that will bear the brunt of the recession. Here are my predictions for how the global downturn will affect the world's major economies:

EuropeOf the major cities, London, disproportionately dominated by its financial centre, will suffer the most. All the related service industries - such as law firms, expensive restaurants and British Airways, which is so dependent on business and first-class financial traffic - will suffer. As revenues drop, so too will the demand for commercial real estate - expect empty offices across the city. The top end of the residential market is also falling sharply, as the rich bankers who bought Mayfair mansions in the good times are now flying home.

Being by far the most 'financialised' of the large economies - much more so than the US, let alone France, Germany, Italy or Japan - London's crisis cannot be confined within the M25. The whole of the UK will be affected. The 'strong pound' policies that favoured the financial sector have seriously damaged British-based export industries with the result that much of Britain's managerial talent has been absorbed by the City during its boom. Despite relatively low labour costs and Europe's most fluid job market, this has seriously eroded the competitiveness of British industry.

Germany, with its unrivalled export industries, will prosper

Although Gordon Brown was the hero of the hour when he injected public money into the banks, London's downfall as a financial centre will diminish British influence in the EU. Germany, much less financialised, and with unrivalled export industries, will prosper. France will remain more or less where it is, and chaotic Italy may