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Euro crisis and global downturn

February 6, 2012

thehimalayantimes.com

Two latest forecasts, one by the UN and another by the IMF, warn of the threat of global downturn and recession in both 2012 and 2013. Unlike the IMF estimates of 3.3 per cent, the UN forecasts show that the growth will be 2.6 per cent only in the current year 2012. The previous forecasts of UN and the IMF for this year were 3.6 and 3.9 per cent respectively. Both predict growth in developed capitalist countries will be 1.2 to 1.3 per cent only amidst very high unemployment and extreme income inequality. They also reveal that countries like China and India will now face economic slow down which have been the locomotive of the global economy, especially since the financial crisis of 2008. These projections, however, do not assess the likely severe adverse effect of steep rise in the prices of petroleum products recently due to increased tensions in the Iranian Peninsula.

Nonetheless, there is broad consensus that despite abrupt withdrawal of fiscal stimulus and bail-outs playing some role in dampening the growth, the major culprit has been the continued debt sovereign crisis in the Euro Zone countries. It is clear that neither bail-outs of billions of euros by the European Union and the IMF have contributed to revive the Greece economy nor parallel rescue packages introduced in other peripheral European countries have eased their crisis. Contrarily, the draconian austerity measures added by continued resource problems in both banking and government systems together with shrinking of bond prices and rising interest rates on bonds, etc have depressed the economic activities further affecting trade etc with very adverse effect on the global economy. Additionally, it is proved that the new fiscal pact agreed last December added by almost half a trillion euro injected by the European Central Bank in the same month to the most affected countries is also not working. Very recent data show that 20 per cent of all Greek businesses closed in 2010-2011. The unemployment rate has gone up to 18.8 per cent. Viewing this, Germany has recently proposed a complete take-over of the budgetary control of Greece by the European Union. The fundamental question is: Why is it so? The reality is that the root causes of the crisis have been ignored. The causes lie in the Maastricht Treaty of 1995, which were fully grounded on the neo-liberalism led premises. The Treaty restricts deficit spending to 3 per cent of GDP by all euro member countries, which is now been forced more ruthlessly even in those countries which are facing debt-led deep recession. In a situation where there is common currency without any scope of devaluation amidst no monetary and fiscal policy space to the individual countries, the only policy option left to the countries facing debt crisis is the adoption of draconian or stiff austerity measures. Today, wage and pension cuts, tax hikes, removal of people from employment and social spending cuts etc are the outcome of this. As obvious, these are anti-growth and anti-worker by their design and by implication they have had the predictable effect of driving the economy further into slump. Now, it seems, Greece will be forced into bankruptcy and out of the euro zone with more damaging impact on the global economy.

Thus, the argument that austerity measures are adopted to enhance export competitiveness with spillover effects on the domestic economy is indeed working oppositely. Another related cause of the euro zone crisis lies in the unwillingness of the European Central Bank to buy the bonds of troubled euro zone countries by resisting such an intervention on free market arguments. In the 1970s, in the name of financial repression, financial liberalization was vigorously pursued. However, no period of effective re-regulation has been seen either at the time of collapse of the dot-com bubble in the late 1990s or housing bubble of 2008. The reason is quite clear. The way the political and economic power has been amassed by the financial oligarchic over the years, re-regulation has simply been a rhetoric or propaganda.

Interestingly, in the recently concluded Davos World Economic Forum, the main focus of debate was on “Great Transformation”. Indeed, this was the same title of a recent book by Karl Polanyi, and hence his ideas prominently figured there. In his book Polanyi argued that the utopian free market capitalism of the 19th century would lead to political and social collapse. Similarly, many mainstream European politicians and academicians, unlike in the past, forcefully argued in almost the same line as by the champions of captured movement that the alternatives to the capitalism empowering only 1 per cent must be explored.

The irony, however, was such that the outnumbered participants capturing the global political and economic power sidelined such voices at the end. Nonetheless, the root causes of financial crisis followed by debt-led euro crisis and their contagion etc are now gradually creating ground for the urgency of alternative economic policy regime that could contribute to augment equitable growth and create jobs massively in the process. Evidently, without such alternative course, mere emphasis on investment or growth may intensify further global economic and social crisis, including Nepal.

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