‘Deal with the consequences’
Economic growth and debt. It’s like the chicken and the egg. Who came first? And can the one exist without the other? That is the status quo of this crisis. You cannot solve one without sacrificing the other. Debts can only be solved by paying them off and before you start cutting your budget you realize that it will affect at the expense of growth and again growth is needed to get out of debt. Here is a causal cycle without head and tail. Europe’s debt: Deal With the Consequences!
What do you have to do to solve a financial crisis? This question is leading the actions of many government leaders and economists these days. They submit solutions. Economic history shows that there are some simple laws in the economy. If you stimulate the economy, you have to put new money into the economy system. It will help with new growth. Great idea to boost the economy, but then it takes the national debt into account. Another solution: go cutting the cost to develop a healthy balance in which growth can occur? Also a good idea because over the longer term it will develop a healthy economic growth, but on the short term it will decline the economic growth and that may again lead to larger debts too. The solutions are not so simple. Savings come mainly from the liberal camp and socialists have previously considered investing in society.
Whether you are follower of Keynes (socialist) or Hayek (Neo-liberal), both solutions have dangerous sides but both solutions have also delivered proven services. We see that the various governments in this crisis choose at first to resolve the economic fall by financial injections into the markets. This financial support has certainly led the economy. This past year has led to a growth of the economy, although last year in March was quiet throughout the economy, and it artificially provided a positive image at that time. The state injections have helped, of course. Discounts on the purchase of cars, additional stimulus package for the purchase of a house (they are bottom prices), these such measures have their effect on the market. But the question is whether it is enough and whether that growth is not too artificial? Yes, they are artificial, but who cares!
Turning the economic wheels, then chances are that they keep rolling forward. The consequences of this policy are already visible; declining growth and extra expense in just two years to massive states’ debts. While everyone looks to South Europe as a textbook example of the consequences of this crisis, we need to face the facts that it is not true. We have lived over 30 years on a big budget and the curve of growth has been possible through massive population growth, economic production and technological innovation. Anyway, the first phase of this crisis is well tackled by a collapsing economy in time to support. The confidence is then returned.
We are now entering the second phase of this crisis; the government with its effort to balance the GDP. How to do it? By cutting the expenses! We see in all major Western countries, all the cuts to expenses. Billions of dollars of savings on the civil service! Trend following institutions receive no public funding anymore and salaries and pensions are frozen. That will help!? The balance will be slightly restored. When we see how big the debt actually is then the cut is just a small solution. With these savings we bring the deficit back to the respectable figure of around the 3% of the GDP. We pay a dime off but the real fact is that our debts are still continuing to grow. Lagging economic growth will lead to further cuts necessary to get to the 3% target. The government as a driver of economic growth pulls the plug out.
Restoring balance is very expensive and economists warn that it is detrimental to the growth of the economy. The early success of the economic growth of recent years would then be flushed down the toilet. The current discussions between liberal and socialist discusses the extent to which savings should be made. The Keynes’ supporters would say that the balance would be restored gradually, but Hayek supporters would say we need quickly to create a new playing field on which the economy can grow.
Honestly, I have to say that we do not know what is true. There is something to be said for both positions, and both ultimately result in restoration quite simply because the negative curve of a crisis cannot be lower than it is. Recovery is a process of a very long time at this moment. Let us assume that cuts lead to an increase in unemployment and a contraction of the economy, if only because of uncertain markets and entrepreneurs who don’t trust the markets. The government accounts for about 1/3rd of the economy and has an influence on many other sectors.
We can therefore expect that there is a next phase in this crisis still to come. A phase of prolonged unemployment and shrinking as we saw in the seventies and early eighties, such as Japan experienced for the last 10 years.
We now know how the cycle works. Growth leads to expansion of the economy (1980-2000) and expansion of market liberalization (2000-2007). Liberalization leads to abuse and abuse to a collapse of financial markets (2007-2009). New resources and leading to shortages on the states’ balance to cut the debts is a next phase (2009 and 2010). This balance must be restored, leading to savings. It will lead to new reregulation on the markets. Those cuts and regulations lead to half a period of prolonged crisis and unemployment (2010-2014) and finally to new conservative growth (from 2014).
So what about this chain, the chicken or the egg? It is a causal cycle described by many economists in world history, and humanity is unable to learn this…. maybe a little.
