At the beginning of this week, the new British Prime Minister, David Cameron warned the British people that they are likely to undergo a long period of austerity, his government’s survey of the economy producing a conclusion that the country’s financial situation was “even worse than we thought.” He argued that a combination of a huge budget deficit and what is known as a “structural deficit” – monies owed by the state – necessitated stringent cuts and new taxes to raise government revenue, measures subsequently described by one public service trade union as “a chilling attack on public sector workers, the poor, the sick and the vulnerable.”
Almost simultaneously, the German Chancellor has produced a package of huge spending cuts, likely it is estimated, to result in about 15,000 job cuts in the public sector and new taxes. Though Germany has done well in its exports even during the financial crisis of the last two years, Ms Merkel asserted that it was necessary to act now, the objective being to inhibit, as in the United Kingdom, excessive growth in the budget deficit. She has also argued that these measures are necessary in order to adhere to the German constitutional requirement for a balanced budget, something that reflects the German fear of the excessive inflation that infected the country in the 1930s, and in effect brought Hitler to power. Mrs Merkel has also made, in the last few weeks, particular reference to a possible worsening of the economic situation in some EU countries, in terms of heavy budget deficits and government debts (sovereign debt). And in tune with her original intransigence in financially assisting Greece, appears to be saying to them that Germany is prepared to lead by example.
In line with these general sentiments this week too, the former Governor of the United States Federal Reserve, one of the few of the recent American economic policymakers to have retained some credibility in the face financial crisis, has warned that in recent times, “any thoughts – any longings – that participants in the financial community might have had that conditions were returning to normal… should by now be shattered”; and that, in the case of the US, “if we need any further illustration of the potential threats to our own economy from uncontrolled borrowing, we have only to look to the struggle to maintain the common European currency, to rebalance the European economy, and to sustain the political cohesion of Europe.” His conclusion, for the United States, has been that “the critical policy issues we face go way beyond the technicalities of law and regulation of financial markets” – a reference to the irresponsible lending of non-bank financial institutions in the US – but that they relate, as in the European case, to “the risks associated with the virtuallly unprecedented levels of public debts as we emerge from recession.”
It is however, not too long ago, that a certain optimism about a stabilizing of the American and European economies seemed to be returning. Some governments and policymakers were even beginning to congratulate themselves on the use of the so-called fiscal stimulus to halt the deepening of recession, and to initiate at least a reversal of the fall in unemployment in the Western economies. The stimulus was seen as ensuring that there could be a brake on excessive unemployment, and therefore the maintenance of an acceptable level of public purchasing power that could take over in stimulating the economy.
Yet, with the controversy in Europe over the measures required of the Greek government, and then the Spanish and Portuguese governments in the Eurozone, the necessity for serious public expenditure cuts seems to have gained headway. As the British Prime Minister has said, in a dig at his predecessor’s efforts, “Nothing illustrates better the total irresponsibility of the last government’s approach than the fact that they kept ratcheting up unaffordable government spending [the fiscal stimulus] even when the economy was shrinking.”
Certainly, the US government had been congratulating itself in recent times on its use of the fiscal stimulus as an anti-recession tool. Yet this week too, the relative stagnation in unemployment figures has begun to sow doubt there too about this measure’s even short-term influence. There had been a hope that with a relative decline of the dollar, exports would become more competitive (as indeed happened in the case of Germany’s exports with the fall of the euro), and that demand, for example from China and other countries, would rise. But as the Chinese themselves have taken their time in deciding to revalue the renminbi, and in providing their own, apparently quite successful, domestic version of a fiscal stimulus, they have also been concentrating their energies in seeking to tie down long-term contracts for the mineral and agricultural imports that they need from African and Latin American countries. And in the face of this multi-pronged strategy, fears have been rising in the US that what they have been describing as a global financial-economic crisis, is really much more a crisis in the current functioning of the Western world economy.
As we survey these developments, a not unreasonable conclusion could well be that not only has there been something of an intellectual crisis in the realm of economic policy in the North Atlantic (Euro-American) zone, but that there seems to be something of a crisis of confidence now taking a further grip on the policymakers. There seems also to be a growing fear that with the rise of China, India and Brazil – but especially China which has been the most daring in terms of innovation in economic policies related to ensuring its own economic development transition, in terms of surviving the “global crisis,” and in terms of establishing new kinds of relationships with the developing world, the balance of power as it relates to both political and intellectual influence over the non-Western world, is beginning to turn in favour of that country. As two recent headlines in London’s Financial Times put it last week, ‘East outmanoeuvres west over Africa’ and ‘China’s growing stake [in Africa] shakes up old order.’
It is in that contemporary context that the G20 met towards the end of last week and, as one account put it, decided that “they can no longer wait until economies are growing strongly before they remove fiscal stimulus.” Yet it is also reported that in a letter to the other G20 counties prior to the meeting, US Treasury Secretary took the view that “Concerns about growth as Europe makes needed policy adjustment threaten to undercut the momentum of the recovery,” and that “fiscal tightening wouldn’t succeed unless we are able to strengthen confidence in the global recovery.”
These diverse positions, and the attempts at compromise between them, are indeed reflected in the G20’s Communiqué. It asserts that “the global economy continues to recover faster than anticipated, although at an uneven pace across countries and regions”, this reinforcing the “importance of extensive international cooperation,” and that “within their capacity, countries will expand domestic sources of growth, while maintaining macroeconomic stability” in coping with what has been described as today’s’ multi-speed world characterized by large differences in growth rates.
It is also in that contemporary context too, that towards the end of last month the United States and China had a continuation of what is referred to as their Strategic and Economic Dialogue (S&ED), which is intended to cover the array of concerns of both countries in respect of economic, environmental and geopolitical issues. The Chinese have recently been showing a greater flexibility in entertaining discussion on United States concerns towards the overvaluation of the renminbi. But they have also clearly been treating the matter not as a one-off issue for resolution separate from other economic issues, but in the context of American concerns to induce greater flexibility on their part on environmental issues and trade protectionism.
Clearly for the Chinese, in a world in which so much is in flux, and in which, certainly from their point of view, the automaticity of American influence is not what it used to be, interests will necessarily be bargained against each other. The United States, once having thought that the post-Cold War world would be one of unipolarity, is coming to terms with this too, as President Obama explained both in his Inaugural Address and in his speech, in Cairo, to the Muslim world. But he is yet to really persuade his citizenry of this new dimension in global economic and political relations, with all its undercurrents of turmoil.