larger | smaller
comments: 3
MADRID "â?? It is now increasingly clear that what started in late 2008 is no ordinary economic slump. Almost four years after the beginning of the crisis, developed economies have not managed a sustainable recovery, and even the better-off countries reveal signs of weakness. Faced with the certainty of a double-dip recession, Europe's difficulties are daunting.
Not only is Europe running the risk of lasting economic damage; high long-term unemployment and popular discontent threaten to weaken permanently the cohesiveness of its social fabric. And, politically, there is a real danger that citizens will stop trusting institutions, both national and European, and be tempted by populist appeals, as in the past.
Europe must avoid this scenario at all costs. Economic growth must be the priority, for only growth will put people back to work and repay Europe's debts.
Understandably, there is a debate about how to achieve recovery. Advocates of austerity argue that debt has a negative impact on growth; proponents of further stimulus counter that it is low growth that generates public debt, not the other way around, and that austerity in times of recession only makes things worse.
But Europeans do not have to agree on everything to find a common course. We can disagree about the long-term effects of liquidity injections, but we can all agree that it is not right to allow profitable companies to fail because credit markets are not working. We do not have to see eye to eye on fiscal policy to understand that it makes more sense to promote investment than to see our productive structure languish. And we all know that it is more cost-effective to invest in retraining the jobless than to allow long-term unemployment.
In any case, doubts about the negative impact of austerity are becoming impossible to ignore. History shows that in a deep recession it is far more dangerous to withdraw economic stimulus too early than too late.
An excessive cut in public spending in the current circumstances can lead to a contraction in growth, which is already happening: the International Monetary Fund now projects that the eurozone will shrink by 0.5% in 2012. Structural reforms are important to guarantee future sustainable growth, but they do not generate growth in the short term, which is what Europe needs. Instead, in exchange for meager progress on debt reduction, Europe risks causing lasting damage to its growth potential.
Compared to a new recession, the long-term cost of stimulus policies is insignificant. In many countries, current budget deficits are the result not of reckless government overspending, but of temporary measures to deal with the crisis. With interest rates already low and the private sector deleveraging, there is little risk of expansionary policies causing inflation or crowding out private investment. By contrast, spending reductions could undermine economic activity and increase, not decrease, the public-debt burden.
Public debt, moreover, should not be demonized. It makes financial sense for states to share the cost of public investments, such as infrastructure projects or public services, with future generations, which will also benefit from them. Debt is the mechanism by which we institutionalize intergenerational solidarity. The problem is not debt, but ensuring that it finances productive investment, that it is kept within reasonable limits, and that it can be serviced with little difficulty.
Yet, ominously, the same arguments that turned the 1929 financial crisis into the Great Depression are being used today in favor of austerity at all costs. We cannot allow history to repeat itself. Political leaders must take the initiative to avert an economically driven social crisis. Two actions are urgently needed.
At a global level, more must be done to address macroeconomic imbalances and generate demand in surplus countries, including developed economies like Germany. Surplus emerging-market economies must understand that a prolonged contraction in the developed world creates a real danger of a global downturn at a time when they no longer retain the room for maneuver that they had four years ago.
Within the eurozone, structural reforms and more efficient public spending, which are essential to sustainable long-term growth and debt levels, must be combined with policies to support demand and recovery in the short term. The steps taken in this direction by German Chancellor Angela Merkel and French President Nicolas Sarkozy are welcome but insufficient. What is needed is a grand bargain, with countries that lack policy credibility undertaking structural reforms without delay, in exchange for more room within the EU for growth-generating measures, even at the cost of higher short-term deficits.
The world is facing unprecedented challenges. Never before in recent history has a deep recession coincided with seismic geopolitical change. The temptation to favor misguided national priorities could lead to disaster for all.
Only enlightened political leadership can avert this outcome. European leaders must understand that adjustment programs have a social as well as a financial side, and that they will be unsustainable if those affected face the prospect of years of sacrifices with no light at the end of the tunnel.
Austerity at all costs is a flawed strategy, and it will not work. We cannot allow a misconceived notion of "discipline"? to cause lasting damage to our economies and inflict a terrible human toll on our societies. All of Europe must agree on a short-term growth strategy "â?? and implement it quickly.
Javier Solana, former EU High Representative for the Common Foreign and Security Policy, Secretary-General of NATO, and Minister of Defense of Spain, is Distinguished Senior Fellow in Foreign Policy at the Brookings Institution and President of the ESADE Center for Global Economy and Geopolitics.
Copyright: Project Syndicate, 2012. www.project-syndicate.org
You might also like to read more from Javier Solana or return to our home page.
Share Tweet
Reprinting material from this website without written consent from Project Syndicate is a violation of international copyright law. To secure permission, please contact distribution@project-syndicate.org. var OB_langJS = 'http://widgets.outbrain.com/lang_en.js'; var OBITm = '1292502431965';var OB_raterMode = 'none';var OB_recMode = 'rec'; var OutbrainPermaLink='http://www.project-syndicate.org/commentary/solana15/English'; if ( typeof(OB_Script)!='undefined' )OutbrainStart(); else { var OB_Script = true; var str = unescape("%3Cscript src=\'http://widgets.outbrain.com/OutbrainRater.js\' type=\'text/javascript\'%3E%3C/script%3E"); document.write(str); } print recommend Send link clip secure rights COMMENTSYou must be logged in to post or reply to a comment. Please log in or sign up for a free account.
COMMENTSYou must be logged in to post or reply to a comment. Please log in or sign up for a free account.
Username Password New registration Forgotten password RangerHondo 04:01 30 Jan 12This is pretty nonsensical. It is exactly the anti-austerity pro debt thinking that has driven us to the edge we are all now facing. Why do we always hear about suposid problems of austerity but when debt is screaming forward we hear nothing? It is money, debt and disequallibrium dynamics..
AK 04:05 30 Jan 12I agree with your strategic statements. However, as you point out that the direction of this global crisis must be led by farsighted leaders; but we do not have any in the current global governments. We are bombarded with slogans by our politicians to take a contrary position than the current government, all to grab offices to increase their wealth. we are globally corrupt from the average citizens to our elected officials (what an irony-the corrupt elects the corrupt) and your views though appreciated by the educated minorities will be ignored by the masses. We have become the generation that is very short term thinking oriented and can accomplish for the near term only. We in this global communication environment have lost the art of analysis and thinking and are very much dominated by sound bites-that's our limitation and we do not acknowledge.
lukehlee 06:45 30 Jan 12The real problem is this: with the real market (or supply chain) process as it exists now, the market as a whole cannot self-generate enough businesses and jobs to keep the level of consumer spending at the desired level, no matter how powerful expansionary or stimulus economic policies are adopted. That is, the existing market (or supply chain) process for the real market is too heavily efficiency-oriented and no longer suitable for the modern information market.
If we do not change this existing efficiency-oriented market process soon to a more effectiveness-oriented market process, that is, if we do not break down the logic of the existing maddening economic condition, I strongly believe that this economic tailspin cannot be stopped. At the very least, as long as the current conditions remain, we cannot achieve sustainable economic growth.
Our economic experts should consider this seriously in their ruminations about the economy.
Please see: â??Overcoming an Economic Sisyphean Task â?? Or, the True Path Back to Economic Prosperityâ? http://goo.gl/YzSfQ
AUTHOR INFO Javier Solana Javier Solana formerly the European Union's High Representative for Foreign and Security Policy, and a former Secretary General of NATO, is a Distinguished Senior Fellow in Foreign Policy at the Brookings Institution and President of the ESADE Center for Global Economy and Geopolitics. MOST READ MOST RECOMMENDED MOST COMMENTED The Perils of 2012 Joseph E. Stiglitz Rethinking the Growth Imperative Kenneth Rogoff The Straits of America Nouriel Roubini How to Create a Depression Martin Feldstein Does Austerity Promote Economic Growth? Robert J. Shiller A New World Architecture George Soros America's Political Class Struggle Jeffrey D. Sachs Did the Poor Cause the Crisis? Simon Johnson The Risky Rich Nouriel Roubini The Second Great Contraction Kenneth Rogoff The Perils of 2012 Joseph E. Stiglitz Does Debt Matter? Robert Skidelsky Africa's Stolen History Juliet Torome Does Austerity Promote Economic Growth? Robert J. Shiller How to Create a Depression Martin Feldstein ADVERTISEMENT PROJECT SYNDICATEProject Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
Project Syndicate provides the world's foremost newspapers with exclusive commentaries by prominent leaders and opinion makers. It currently offers 58 monthly series and one weekly series of columns on topics ranging from economics to international affairs to science and philosophy.
PROJECT SYNDICATE The Magic of the Market Martin Feldstein Will the most dramatic interventions in financial markets since the Great Depression result in a long-term expansion of the role ofgovernment? ...read more Anatomy of the Global Economy J. Bradford DeLong Is a new global reserve currency needed? Do central banks need to be reigned in? Will health-care reform help or hinder efforts to control government budgets? ...read more Capitalism Then and Now Harold James Is globalization reversible? Do currencies rise and fall like empires? How does culture influence economic development and performance? ...read more © Project Syndicate 1995 - 2012 How to become a member | Member papers | Support us | About us | Contact us _bizo_data_partner_id = 790 var OBCTm='1292510578203'; var _comscore = _comscore || []; _comscore.push({ c1: "2", c2: "8756795" }); (function() { var s = document.createElement("script"), el = document.getElementsByTagName("script")[0]; s.async = true; s.src = (document.location.protocol == "https:" ? "https://sb" : "http://b") + ".scorecardresearch.com/beacon.js"; el.parentNode.insertBefore(s, el); })(); _qoptions={ qacct:"p-f8E80KYHdFRZg" }; (function(w, c) { (w[c] = w[c] || []).push(function() { try { w.yaCounter6251587 = new Ya.Metrika({id:6251587, clickmap:true}); } catch(e) { } }); })(window, 'yandex_metrika_callbacks');You must be logged in to post or reply to a comment. Please log in or sign up for a free account.
You must be logged in to post or reply to a comment. Please log in or sign up for a free account.
This is pretty nonsensical. It is exactly the anti-austerity pro debt thinking that has driven us to the edge we are all now facing. Why do we always hear about suposid problems of austerity but when debt is screaming forward we hear nothing? It is money, debt and disequallibrium dynamics..
I agree with your strategic statements. However, as you point out that the direction of this global crisis must be led by farsighted leaders; but we do not have any in the current global governments. We are bombarded with slogans by our politicians to take a contrary position than the current government, all to grab offices to increase their wealth. we are globally corrupt from the average citizens to our elected officials (what an irony-the corrupt elects the corrupt) and your views though appreciated by the educated minorities will be ignored by the masses. We have become the generation that is very short term thinking oriented and can accomplish for the near term only. We in this global communication environment have lost the art of analysis and thinking and are very much dominated by sound bites-that's our limitation and we do not acknowledge.
The real problem is this: with the real market (or supply chain) process as it exists now, the market as a whole cannot self-generate enough businesses and jobs to keep the level of consumer spending at the desired level, no matter how powerful expansionary or stimulus economic policies are adopted. That is, the existing market (or supply chain) process for the real market is too heavily efficiency-oriented and no longer suitable for the modern information market.
If we do not change this existing efficiency-oriented market process soon to a more effectiveness-oriented market process, that is, if we do not break down the logic of the existing maddening economic condition, I strongly believe that this economic tailspin cannot be stopped. At the very least, as long as the current conditions remain, we cannot achieve sustainable economic growth.
Our economic experts should consider this seriously in their ruminations about the economy.
Please see: â??Overcoming an Economic Sisyphean Task â?? Or, the True Path Back to Economic Prosperityâ? http://goo.gl/YzSfQ
Project Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
Project Syndicate provides the world's foremost newspapers with exclusive commentaries by prominent leaders and opinion makers. It currently offers 58 monthly series and one weekly series of columns on topics ranging from economics to international affairs to science and philosophy.
Read Full Article »