August
2012 marks the 4th anniversary of the global financial crisis which began in
2008. On its fourth anniversary the Euro zone 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 Scrap page
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 Democrat 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 Euro zone 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 Euro zone. 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.
Or,
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