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OPED – Austerity Bad for Recovery

ROME/BANGKOK, Jun 6 2013 (IPS) - No wonder the Euro zone countries, including Germany, are witnessing growing protests against the severe austerity measures. The unemployment rate in the Euro zone has exceeded 12% with close to 20 million people, mostly young, without a job.

There are no signs of a turnaround as unemployment is still rising in some countries. In March 2013, more than one youth in three was unemployed in Italy, Portugal and Slovak Republic, and more than one in two in Greece and Spain!

Despite harsh austerity measures aimed at bringing down public debt, the average public debt in industrialized economies increased from 70% of GDP in 2007 to about 110% in December 2012 – its highest level in half a century. Government debt in the 17-nation euro zone is supposed to peak at 94.5% in 2013, according to European Commission forecasts.

It was claimed that rapid fiscal consolidation by front-loading ruthless cuts in public expenditure — social security, health and education — would boost investor confidence and thus lead to rapid economic recovery.

On the contrary, countries pursuing harsh austerity measures are now mired in a vicious circle of recession, falling revenue and rising public debt. And when the promised recovery effects of austerity did not materialize, the cuts were said to have been insufficiently deep.

In the meantime, the academic work that provided the intellectual foundations for such severe measures has been found to be seriously flawed, if not misleading. The International Monetary Fund, which prescribed fiscal consolidation at the first sight of the so-called green shoots of recovery in mid-2009, has recently admitted that it had grossly under-estimated the contractionary impact of such measures.

Meanwhile, the UN system has long argued that fiscal retrenchment exacerbated the 2008-2009 financial crisis and subsequent recession. Fiscal consolidation has raised short-, and especially long-term unemployment, hurting wage-earners disproportionately more than profit- and rent-earners.

When the crisis first hit, world leaders in the G-20 economies acted decisively with large fiscal stimulus packages totalling $2.6 trillion during 2008-2010. The ILO estimates that 7-11 million jobs were thus created or saved in the G20 countries in 2009 alone.

But after that, from late 2009, financial markets shifted media attention to the ballooning public debt. Thus, governments have been pressured to take drastic measures to cut government debt and deficits, ostensibly to engender investor confidence and thus foster recovery.

With domestic demand declining, growth is supposed to come from export demand, but obviously, all countries cannot simultaneously find external markets for their output – as implied by much of the public rhetoric on the EU-US trade negotiations.

Hence, addressing growing unemployment and public debt has to primarily involve reinvigorating domestic demand. This would entail both immediate policy actions to expand domestic demand as well as medium-term policies to address structural issues and longer-term challenges such as climate change.

Governments should expand public services including active labour market programs, subsidized childcare, universal healthcare and education. Such public provisioning enhances the ‘social wage’, taking pressure off wage demands as businesses strive to recover. These measures help ensure social and political stability at modest fiscal cost.

Eight decades ago, President Franklin Delano Roosevelt introduced such a New Deal for a strong and sustained economic recovery. It not only ushered in a new era of economic growth and prosperity, especially in some poorer regions in the US, but also addressed widespread environmental, economic and social distress.

The current crisis needs such a response. But after decades of globalization and environmental deterioration, it must necessarily involve international cooperation and commitment to sustainable development.

Such a Global Green New Deal (GGND) would have employment elements in line with the Global Jobs Pact, but would also induce private investments besides improved welfare provisioning contributing to the Global Social Protection Floor. It should therefore be central to international recovery efforts complemented by national stimulus packages aimed at reviving and greening national economies.

The GGND will inevitably increase public debt in the near term; but in the longer-term, it will engender sustained economic growth, employment recovery and fiscal consolidation, as the New Deal did.

Many countries had huge public debts when WW II ended. Despite calls then for drastic expenditure cuts, governments spent a great deal on economic reconstruction and social welfare. Had they caved in to the fiscal hawks of their times, post-war European recovery would have been delayed and the Cold War could have been lost.

As governments continued with massive expenditure to rebuild their countries, economies grew all over the world, and debt diminished quickly with rapid economic growth and fast growing tax revenues during the post-war Golden Age. Clearly, deficits and surpluses should be adjusted counter-cyclically over business cycles in the medium term, instead of being dictated by the short-termism of bond markets.

[1] Jomo Kwame Sundaram is Assistant-Director-General, Economic and Social Development Department, Food and Agriculture Organization of the United Nations in Rome.

Anis Chowdhury is Director, Macroeconomic Policy and Development Division, UN Economic and Social Commission of Asia and the Pacific

 
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