Opinion Sur
A new, crucial debate has been brought up in relation to the global economic and financial crisis “exit strategy”: either to maintain the stimulus policies until sustainable recovery becomes apparent, or to impose an adjustment and austerity process that may progressively reduce the lofty fiscal deficits and indebtedness levels incurred by the developed countries to face the economic crunch and overcome the financial crisis. The prevalence, at the global level, of one or the other strategic position may buttress the weakened recovery or, conversely, lead to a new crunch or, more apocalyptically, depression, as Paul Krugman envisions.In the face of such a fragile recovery in the US and such a severe crisis in Europe, the answer to this dilemma is crucial for the future of the global economy. The clash between both strategies has already aroused heated debate at the Toronto G-20 meeting. On the one hand, Europe and Canada proclaiming adjustment and austerity; on the other hand, the US and Latin America supporting spending and stimuli. The issue was brought up, but no decision was reached by consensus, only a final declaration stating that each country should do what it deems most appropriate, and that both spending and austerity are welcome depending on the circumstances, within a framework of fiscal sustainability.
Like in Toronto, the academic world debates and polarizes between both stances. For Paul Krugman, an outspoken advocate of the Keynesian policies, “German austerity, imposed on other nations in the Eurozone, contrarily to what is expected, will worsen the European crisis making it that much harder for Spain and other troubled economies to recover.” That opinion is shared by George Soros, who fiercely attacked the pro-cyclical policies imposed by Germany on the weakest Eurozone countries, ignoring the lessons from the Great Depression. Similar views are held by George Stigler, Martin Wolf and, finally, Robert Skidelsky, a Keynes biographer, who harshly criticized the “conversion to austerity” and masterly summarized how crucial a decision in one direction or the other will be: “We are about to embark on a momentous experiment to discover which of the two stories about the economy is true. If, in fact, fiscal consolidation proves to be the royal road to recovery and fast growth, then we might as well bury Keynes once and for all. If however, the financial markets and their political fuglemen turn out to be as “super-asinine” as Keynes thought they were, then the challenge that financial power poses to good government has to be squarely faced.”
Standing on the opposite side are the major European leaders, such as the President of the European Central Bank, Jean-Claude Trichet, who believes that less government spending will result in an increase in private spending because uncertainty as to the government’s debt and the tax policy will be reduced, thus rebuilding confidence. This position is further supported by the Republicans in the US, and particularly the new British political leadership, especially the Economy Ministrer, Christine Lagarde, who, holding a slightly divergent position from that of the “ultra-austerity” proponents, stated that there exists no contradiction between government spending rigor and recovery, and even coined a new word for it, “ rilance ”,(a combination of “rigueur” for rigor and “relance” for growth), which she defined as a subtle dosage of responsible government spending and growth policies in a difficult situation.
We are undoubtedly in the presence of very divergent positions, and in this context it is difficult to approach the issue with a view to coming closer to an answer to the question we have made, and that the entire economic world is making: Stimulus or austerity? Spending or adjustment? No economic theory exists to predict how things will evolve, and build the exit strategy in a financial and economic crisis whose epicenter is the very heart of the developed world. Today, economic theory no longer leads the analysis; the theory is built, and hypotheses are verified empirically, as the crisis spreads and expands. Hence, embarking on a more consistent debate around this controversy requires being aware of the global context in which this controversy occurs. We will thus now identify the aspects of reality that are most relevant to this strategic dilemma, only focusing on those over which there is relative consensus:
(i) There are no doubts that the economy and finances are completely globalized; hence, the measures regarding the crisis a country or region may adopt will have repercussions on a global level. The “laissez-faire” having no consequences of the Toronto Declaration is ingenuous.
(ii) On the other hand, despite globalization’s great breadth, there also exist specific realities: the EEC and the Eurozone make up superior integration schemes that must, regardless of winning or losing in the attempt, look after their conquests.
(iii) The United Status is the world’s largest economy and main market, driven by consumer spending, which explains 70% of the GDP. Here, spending reduction may cause a tremendous impact on the US and the global economy.
(iv) The role played by the BRICs and other countries in Latin America, Asia and Africa is essential to maintain the activity and trade levels during the transition towards a global scenario of greater growth and employment recovery, particularly in China, whose level of activity is ever more instrumental in sustaining global demand. None of them has, during the crisis, generated the fiscal imbalances that have characterized the developed world, perhaps because many of them had already suffered their own crises, and adjustment measures were already in place. They have no urge to implement austerity policies; instead, they have the need to establish policies aimed at stimulating growth, innovation and inclusion, as well as strengthening their export base.
Within the framework of this reality, we feel tempted to conclude, very preliminarily, that Europe needs to implement a “rilance” policy, using again Christine Legarde’s term. The deficit and indebtedness levels, mainly those of the PIIGS, were untenable and threatened the entire European integration scheme, mainly their common currency, the euro.
Now, we take Lagarde’s term for valid as long as it means rigorous, but also sensitive and rational, adjustment, further improving government spending quality and efficiency. In all the pre-crisis years, there was a pervasive squandering of government resources, in sync with the big European “credit and consumption party”. It would not be fair that the cost of such party be paid by those sectors whose beneficiaries offer less social and political resistance, as it is already happening in many EEC countries. “Rigor and recovery” in cutbacks entails a transformative approach, both in the social and political spheres. Europe cannot lose productivity, competitiveness or social and political stability in relation to the rest of the world. If the trim is made with indiscriminate fervor, Europe will worsen the problems it had been facing before the outbreak of the global crisis, and will incur “politically correct” deficits and overindebtedness, its financial system being safe from sovereign risks, but economically lagging as compared to the rest of the world.
What may work for Europe may not for the other countries. I believe it is still very risky to start an expense reduction policy especially in the US and the BRICS although Obama’s opposition in Congress challenges the Keynesianism with which the US initially faced the contraction. A few days back the fears of Congress concerning the deficit frustrated Obama’s administration efforts to approve a new mini stimulus.
In sum, a lot has happened between Pittsburg and Toronto: while in last year’s G-20 meeting the leading economies prompted a global Keynesian stimulus by promising a fiscal incentive of 2% the world GDP to buttress demand, at the June meeting, the developed countries undertook to cut their deficits in order to bolster a collective government spending adjustment of about 1% of their combined GDP next year, the largest synchronized budget crunch in at least four decades.
It is likely that the result will not be another Hoover type depression, but it will surely be a weaker recovery, socially more painful and much slower than we had foreseen when Keynesianism still prevailed over austerity. We still need to verify the sustainability and strategic efficacy of both positions. The coming months will be key to elucidate it.
