Greek Election Results: Austerity Does Not Work
In the aftermath of the crises that plagued the world economy in 2008 and 2011, policy agendas all over the world have understandably been dominated by exertions to cut back on spending and reduce public deficits. But world leaders, particularly in Western nations, should put more emphasis on supporting job-creating growth if they are to find a sustainable way out of the economic slump.
Economic growth, the forgotten issue
The real economy — the part of the economy that is concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets (see definition from the Financial Times lexicon) — has been forgotten in the midst of the recent crises. There has been too much emphasis on implementing austerity measures to fix a crisis whose core problem is not the overwhelming public debt syndrome, but rather the lack of real economic growth.
Rising unemployment, plummeting economic activity, relocations abroad and, in some countries, falling wages are signs that the core of the problem is the real economy. For the economy to resume its role as creator of jobs and wealth, we need to invest in it — that is to say bet on growth.
Finding the best way to bet on growth is at the core of the New York Forum’s mission. The forum was specifically launched in 2010 to investigate and brainstorm over innovative solutions to the ongoing international crisis. In all likelihood, the most effective solutions involve combining structural reforms aimed at reducing public debt while actively supporting entrepreneurs and other economic actors.
Indeed, countries that never stopped investing in their economic growth have proved resistant to the crisis. This is the case of emerging economies, first and foremost China and Brazil, who have not experienced the debt trap. On the other hand, "older" Western economies did not get over the multiple shocks of the 2008 and 2011 crises and have become timid when it comes to investing in boosting their economies. But things may be turning around.
European and North American economies are opening up to growth-focused policies. Italian prime minister Mario Monti has been working hard to put the country’s real economy back on track. In the U.S., Barack Obama has long had a very pragmatic approach on the matter. France and Greece’s recent electoral outcomes are also likely to steer both countries away from observing strict austerity measures. Germany too, and perhaps most significantly, seems to be shifting its position on the subject.
German chancellor Angela Merkel, who has previously been a champion of austerity measures in spite of attacks from economists — both in rival and her own political families, is showing more flexibility towards loosening the rigor of budget cuts and investing in the economy. This shift is likely to open up opportunities for boosting sluggish Western economies.
Supporting growth, not public deficits
It is good news that economic growth has resurfaced on political agendas, but the trend carries its own share of risks, including dangerous public spending frenzies and naive political promises. Boosting the economy does not mean going overboard on spending.
The debt crisis has taught us harsh lessons we can no longer ignore. Western nations have been overspending for decades and public debt, always unsustainable, has finally spiraled out of control.
Governments should face this basic truth and not give in to the temptation of implementing extreme austerity measures and freezing investments. Finding the right balance between conservative public spending and active investment in economic growth will require imagination, boldness and a propensity to be realistic on the part of governments. Part of preventing new rounds of bankruptcies in Western states will include restructuring public sectors.
But boosting welfare or nationalizing sections of the economy are, luckily, far from being the only alternatives to public spending frenzy. We need to look for ways to channel new energies and support wealth-creating investments.
Now, in a globalized world, competitiveness is the only way to guarantee growth. Lower labor costs, for example, should be ensured by reducing the burden of social protection on employers —before they are forced to cave in to the pressures of relocation.
A focus on economic growth based on responsible spending and wealth creation in real and sustainable terms — that is the challenge world economies have to take on.