WORLD ECONOMIC CRISIS: The Austerity Policy begins to Crack

The narrative of the great and the not so good in World Economics is well established.  Forget the lessons of the past, and take no notice of the specific circumstances of the hour, massive reductions in public spending is the name of the game.

The whole world economy has been following the same well worn path of tackling the deficit problem by cutting public spending and satisfying the markets.  Each austerity package has been followed by another, and then another.

Each Euro zone country that fails to reduce the deficit enough gets a bail out of sorts, at the last minute.

Yet the elephant in the room keeps trumpeting loudly.


The truth about the deficit is that without growth the deficit will remain or get progressively worse. Yet the austerity rhetoric has continued unabated.

Yet in the last few weeks, new noises are being made by those who have been the ones leading the Austerity approach.

The IMF and World Bank have both been making noises about the lack of growth.  As the bad economic news continues to grow with each passing week, in the US, the Euro Zone and in the world at large, the penny is beginning to drop.

Spooked by the recent turmoil in the markets, Christine Lagarde has intimated that austerity alone will not sort out the problems.

The markets will never be satisfied as the last months effective crash of share prices has shown.  The markets want both deficit reduction, cuts in public spending and growth.  This, sadly is not possible.

The spectre of a “double dip recession” is causing everyone to panic regardless of the economic realities.  Having had 9 months of economic stagnation, we are, as far as the general public is concerned, still in/or have gone back into recession.

We are staring a great recession or depression in the face.  A decade of stagnation.  Some economists are now suggesting the a Japanese style stagnation of two decades or more is now a real possibility.

The problem we face is that the rhetoric of austerity has altered and depressed consumer feeling throughout Europe and elsewhere, especially in the UK.  In addition, suppressed wages and the decline of standards of living over a protracted period of years is making everyone below the extreme higher incomes, less well off and gradually getting poorer.  Our high streets are turning into ghost towns.  Something last talked about in the early 1980’s.

In the UK, some departments within government are using rhetoric to justify policy options which the treasury would not dare to utter.  To justify interfering in the housing market and to build  a new high speed rail line.

The warnings from predictable circles like  Ed Balls, the shadow chancellor, now include others less used to such associations like Christine Lagarde, of the International Monetary Fund, John Cridland, director general of the CBI, and Bill Gross, head of the world’s largest bond fund, Pimco.

The head of the world bank Robert Zoellick, does not think current austerity measures and short term liquidity measures will be enough to save the Euro zone calling for what he calls “decision time”.  Namely, split the Euro zone, or fiscal union.

Meanwhile the UK’s growth forecasts have been downgraded err . . .. yep again.  When this government first came to power, forecasts were in the region of 2.7% annual growth for 2011.  The British Chambers of Commerce has downgraded its forecast from 1.9% in January of this year to 1.1% now. The Bank of England last month cut it’s growth forecast from 1.75% earlier in the year to 1.4% now.

Today the OECD announced its fear of the world economy grinding to a halt, and although maintained it’s support for cutting public expenditure and fiscal tightening, expressed a view that this should be eased at every opportunity.

What is apparent is that the Austerity machine along with the world economy is grinding to a halt.   Fiscal tightening will just slow growth further causing more difficulties.  Options though are now limited and world action is becoming fragmented as countries begin to focus on their own positions.

For George Osborne, the political game may well be slipping him by.  Clearly a calculation was made when the current government came to power that we would have cuts before a recovery took hold and a recovery to be acclaimed before going to the country at the next general election.  This is looking rather optimistic.

However, entrenched positions are backing him into a corner on fiscal tightening.  The talk of a plan B would no doubt spook the markets even more, and make his and David Cameron’s credibility suffer.  Perhaps they can save face by taking a “common sense” or “flexible” approach and doing more to support infrastructure projects and housing, and thus investing for the future.  A little loosening of the clenched fist of fiscal policy rather than reverting to a full blown “deficit denier”.

Maybe George Osborne knows something we do not, that he is holding back, waiting for the calamitous collapse of the Euro zone before altering course?

What is clear is that austerity alone will not sort out the world economic problems  and those with the unelected power are beginning to realise this.


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