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18 August 2011

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NEW ECONOMICS NEEDED | ‘JUSTICE, EQUALITY AND FREEDOM’

‘Austerity’ and the meltdown in global markets

BY MICHAEL BURKE

Sinn Féin protest at last month’s IMF meeting in Dublin

» BY MICHAEL BURKE

THERE IS an old joke that Wall Street has predicted seven out of the last two recessions. It is true that many big falls in stock markets don’t lead to recessions, not least because the US Federal Reserve Bank routinely responds by cutting short-term interest rates.
But there are good reasons for believing that the recent turmoil in global financial markets heralds something significant  - at the very least a prolonged period of slow growth and a general rise in unemployment.
The first is that most central banks, including in the United States, have little room to cut rates as they are already close to zero. This ability to loosen monetary policy is the main reason why most stock market falls don’t end in recession. The recent innovation of ‘Quantitative Easing’ (often called ‘printing money’) is unlikely to help much either. So far, the way it has been done has proved disastrous, simply stoking global inflation.
The other policy weapon available is fiscal policy, an increase in government spending. But this is actually the heart of the problem.
Latest data shows that the US economy is already experiencing its weakest recovery in the post-World War Two period, despite having had one of its most severe recessions. Usually, economists expect a sharp recession to be matched by a sharp recovery, not a snail-like recovery.
But the event which caused renewed crisis was political. The recent compromise deal in the US Congress, which traded a temporary increase in the federal debt ceiling in exchange for cuts to government spending, is the immediate cause of the crisis. Lower US government spending can only lead to lower economic growth. While the US remains the world’s largest economy, weaker growth there inevitably affects the global economy. Global stock markets have slumped because of ‘austerity’ – US austerity.

The European Crisis

It is widely reported in the Irish and wider European media that the cause of the crisis is the continued strains in the EU government bond markets. But both US and Asian stock markets have been making gains for over a year even while Europe has been full of talk of downgrades, bail-outs and defaults.
The increased strains on EU government bonds are a symptom of the latest crisis, not its cause. Because EU taxpayers have been bailing out bondholders and absorbing all the effects of a private sector investment strike, the finances of many governments are close to breaking point. By these bail-outs of the private sector, government bonds have become the weakest link in European financial markets.
Added to this are the pressures from the obvious failure of the most recent bail-out of Greece’s bondholders. Clearly, any deal which includes €28billion of Greek privatisation proceeds and yet results in just €26billion in debt reduction cannot be called a bail-out for Greece. Yet again, EU taxpayers are on the hook, this time for a deal which gives Greece’s bondholders 79 cents on the euro when they were worth only 50 cents.

The Irish Crisis

It is no surprise that supporters of ‘austerity’ in Ireland refuse to face facts in relation to the negative impact of similar policies being adopted in the US. They would have to admit that austerity doesn’t work.
It is also no surprise that Irish women and men have to fight hard against the impositions of the new Thatcherites in Westminster.
But the Dublin governments, past and present, embraced ‘austerity’ voluntarily, without any international pressure. Even Athens governments, which tend to represent the interests of the shipowners and the generals, put up some resistance.
Post-partition, the dominant group in 26-County society has always worked on commission for other interests, now comprising US multinationals, British banks and EU finance houses.
Some have advocated breaking free from the euro as the solution to the Irish crisis. But this would give the gombeen men a new lease of life while doubling the debts of Irish taxpayers.
Instead, republican principles of ‘Justice, Equality and Freedom’ can be applied.
‘Justice’ would mean letting the burden of bad investment decisions fall on the shoulders of bondholders.
‘Equality’ would require first an island-wide investment programme to create jobs.
And ‘Freedom’ would mean a complete transformation of the structures of the EU so that it represented the interests of the citizens of Europe, and not their bankers.

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