Global Economic Crisis: The Curse of Austerity

August 2012 marks the 4th anniversary of the global financial crisis which began in 2008. On its fourth anniversary the Eurozone is teetering on the brink of collapse as Spain has now joined Greece as the sick men of Europe. The US economy continues to churn out more unemployment and the UK economy has officially gone into a recession, again, the infamous double dip recession. Something most politicians denied would raise its head is now officially getting worse.

An analysis of the solutions to date show that none of the factors that caused the crisis have been dealt with, in fact Western governments have attempted to keep Capitalism afloat at all costs.

1. Initially Western government’s attempted to solve the crisis with a combination of stimulus plans and nationalisations of failed institutes. In the UK Northern Rock a regional bank was taken over by the British government, whilst other banks were provided with bailouts, similar actions took place in Germany, France and the US. Whilst this stopped the banks from collapsing it in no way dealt with the issue of economic growth and the negative sentiment regarding the future of the global economy. Many criticised such actions as bankers were being bailed out whilst a recession in Western societies grew deeper.

2. At the peak of the economic crisis many Western states developed Stimulus packages in order to save their economies from collapse, the most infamous being the US $1.2 trillion stimulus package in 2008. However any stimulus was always a high-octane boost and a temporary measure. They were designed to kick-start stalled economies, not to fuel sustained economic growth. Government initiatives such as Car Scrappage schemes, the reduction in the general sales tax in the UK and tax credits for first-time home buyers as seen in the US and France, all were attempts to kick start economic growth, as these programs ended, so did their contribution to the global economy.

3. Western governments also resorted to Quantitative Easing (QE), a new development which was an electronic method of printing money. This unconventional policy was used by central banks to stimulate the national economy when conventional policy had failed. A central bank implements Quantitative Easing (QE) by buying financial assets to inject a pre-determined quantity of money into the economy. This is achieved by purchasing financial assets from banks with new electronically created money. This action increases the reserves of banks.

All of these solutions have not dealt with debt fuelled growth, whilst debt caused the problem more debt was thrown at it, Western governments attempted to treat the patient with the disease itself.

Delusions of Austerity

With all solutions failing, Western governments in 2011 began touting austerity as the way forward. With revenues for Western national governments falling in the middle of a recession governments such as France, Germany and the UK began touting the reduction in government deficit as the way forward.

The need to control national deficit levels needs to be separated from general debt. In simple terms, deficit is the difference between what a government spends and what it generates, in a one year period. For example, if a man was to earn £30,000 a year, but spend £40,000, then he would be in deficit of £10,000.

So when the Conservative-Liberal Demeocrat government came to power, David Cameron spoke with regards to trying to bring the deficit down, he was not talking about bringing down the debt, just the amount the UK will need to borrow above what it generates in income! At the start of 2012 the world’s largest economies had £4.9 trillion in debt due for repayment during the year. This is a combination of previous debts and deficits. Such debts like always were rolled over by purchasing more debt to repay previous debts.

Such a policy in reality is not geared towards growth, which would create jobs and income for society and thus lead to overall economic growth but towards cutting the government debt. Austerity measures are typically taken if there is a threat that a government cannot honor its debt liabilities. This is a very specific objective and different to economic growth. With the threat to the countries credit rating being cut, the UK government did everything it could to show it was dealing with its debts.

Hence austerity in reality was to please the financial markets as the world’s largest economies will always need to borrow and in order to maintain their credit ratings, austerity is being undertaken to maintain a position of economic strength. Credit-rating firms have warned the UK government that their rating could be at risk if it eases its deficit-reduction plan.

Hence across the world’s largest economies we see no policy of dealing with unemployment and the fall in demand which is leading to a prolonged recession. Austerity – which in reality is another name for government cuts is compounding the economic crisis. The effects of austerity can be seen by its political fallout.

Political Crisis

In the first 6 months of 2012 elections have taken place in key countries in Europe and incumbent governments suffered heavy losses, these results highlight Europe’s frustrations with traditional parties and growing support for less conventions political parties.

In France the incumbent failed to win the French elections in May 2012 for the first time in 30 years, whilst in Germany the pirate party – a party without a fully developed political programme won 8% of the vote in regional elections giving them a stake in national politics. Their message was only of anti – establishment. In Greece the two dominant parties suffered their worst losses ever. The Greeks have become so disillusioned with the mainstream political parties they resorted to more radical parties, who have traditionally been on the fringe, due to their radical solutions.

12 governments in the Eurozone out of the 17 have collapsed or been voted out in the last 2 years. This phenomenon proves the impossibility of implementing austerity without losing popular support. As traditional opposition parties offer little different to those in power Europe is turning to less conventional parties that were previously marginalised by the dominant ruling parties. Even Germany the more economically sound of the EU nations has not been immune from this and fringe radical parties saw electoral success. The German Chancellor had hoped to kick out a weak Red-Green coalition in the state of North Rhine-Westphalia in April but the region’s 13 million voters decided otherwise. North Rhine-Westphalia or “NRW” is Germany’s most populous state, with a large share of the German economy – the largest on the continent – and a history of setting trends in national politics.

All attempts at creating economic growth have now failed. The stimulus packages have driven artificial growth, whilst Western nations have not provided such a leg up for their economies for some time the free market has been unable to grow on its own in any sustainable way and now the spectre of double dip recession has become a reality.

It is difficult to see where economic growth will come from and for this reason the global economy and especially the West will go through a long period of instability which will create more unemployment and riots as has been seen in Greece.

Greece is being squeezed to virtual breaking point. With its national debt more than its economy and with a quarterly debt bill going into the billions, Greece in reality will never be able to repay its bills. The cost of turning to the EU is bailouts with stringent conditions attached, such as slashing spending and cutting the civil service. The Greek budget is now being determined by Germany, who expects its repayments to take priority over the countries priorities. Every time Greece turns to Europe for help, further stringent conditions are placed on it for receiving a bailout. Interestingly Greek debt repayments are mainly to German, French and Spanish banks. Greece is teetering on the brink of collapse, due to the political considerations of Germany and France.

After 4 years of economic crisis, the West is in no better a situation. In fact we are witnessing economic nationalism as each country fights for its own survival. The smaller economies are being held hostage by the larger economies of the world.

There are really only two outcomes which may eventually lead to economic recovery:

– The first is the double dip recession turns into a depression, prices hit rock bottom and this leads to property, loans and commodity prices being seen as cheap and this kick starts economic growth as such assets are then purchased.

– The second possibility is China bails out the West. China’s vast trade and financial surpluses are causally linked to the unsustainably large debts of the US, UK and a swathe of the Eurozone. It would be in their interests to bail out the West. This would also mean the Western world will have to accept Chinese global leadership. Here the issue is not whether the West will accept such a bailout but rather will China pursue such a policy.