The common perception is that the crisis originated in the USA. Much of the export surplus built up by China and the oil-exporting Arab countries was invested in western financial institutions, particularly in the United States. This provided the countries of the West with limitless credit, enabling them to keep interest rates exceptionally low. This, in turn, enabled members of the public to borrow beyond their means. When the US Federal Reserve increased interest rates in response to sharply rising costs of living, including that of oil (caused in part by the wars in Iraq and Afghanistan), millions of borrowers could not pay their mortgages. The banks which had lent money to them could not recover their assets. As a result, the capacity of the banks to lend dried up. In fact, the situation had reached a point where the economy was operating on the basis of lending. The consumers purchased goods and services by borrowing money from financial institutions (i.e. banks) without much reference to their earning capacity. When the lending was no longer available, the capacity of consumers to buy goods and services produced in the economy was reduced sharply. The crisis affected not only the banking sector, but the economy as a whole. Factories producing such goods (e.g. cars), and businesses buying and selling those goods, were unable to trade. Unemployment began to rise, further reducing the demand for goods and services, thereby accelerating economic decline.
This scenario was not confined to the United States. It spread around the world. In fact, the same process was at work in other countries, particularly in the West. Ireland provides a paradigm example. During 1987-2003, GDP (gross domestic product) rose from 70% of the EU average to 136 %, while unemployment fell from 17% to 4%. GDP growth reached 10% a year - three times the EU average. Ireland became the fourth richest country in the OECD (Organisation for Economic Cooperation and Development). By 2000, however, it appeared that the process was not really productive. Bank lending, mainly to developers and home owners, rose by 30% annually. Anglo-Irish Bank’s lending amounted to twice the national debt. In 2000, household debt had gone up from 60% to almost 200% of GDP. In September 2008, the banks imploded, lending stopped, the value of assets plummeted, and Ireland became the first country in the Eurozone to fall into recession (Sunday Times Magazine of 29 March 2009, pp. 23-24).
On 7 April 2009, the Irish Finance Minister in parliament introduced an emergency supplementary budget - the second in six months - raising taxes by 1.8 billion Euro and cutting expenditure by 1.5 billion Euro with a view to reducing the budget deficit by 3.3 billion Euro. This approach stands in sharp contrast with that of the UK, USA and other counties, which are cutting taxes and boosting expenditure in order to stimulate their economies. However, given the size of the national deficit, Ireland had no choice but to resort to these measures. In view of the deficit currently contemplated in the United Kingdom (and in the USA), this is very likely to occur also in these countries. Public debt is expected to rise to 70% of GDP in Ireland over the next four years, from 33% in 2008. Under the new emergency budget provisions, a new state agency is to assume bad debts of banks (estimated to be around 80 billion Euro (approx. £72 billion), and far stricter controls and supervision of banks and other institutions are also to be introduced.
The experience in Ireland might be indicative of what might happen in other countries if a similar approach is adopted.
The 2009 budget indicates that this is likely to happen in the UK. The budget deficit for 2009-2010 is £175 billion (12% of GDP). Public debt will rise to £1.2 trillion by 2013-2014 (almost 80% of GDP). The budget will not return to balance until 2018 or later (perhaps 2032). Taxes must rise to £45 billion a year to reach the budget target. Top rate of tax was raised to 50% for those earning over £150,000 as from April 2010. Those earning over £100,000 would lose their tax free allowances. They will also lose the higher rate of relief they get on pension contributions. Spending cuts from 2011 are likely to be £2.3 billion for the NHS, £1 billion for education and £600 million for local councils. The Chancellor of Exchequer admitted that the economy would slump by 3.5% in 2009, but predicted that it will return to growth of 1.25% in 2010 and to 3.5% in 2011. This view is not shared by economic experts and the IMF. The growth in the UK economy for the last decade has been due to heavy investment in the City by China and the oil-exporting Arab countries including Saudi Arabia, surging public spending and roaring housing market. These are no longer present, certainly not to that extent.
In fact heavy national debt, coupled with the government's inability to pay back the debt is likely to threaten monetary stability. The pound is losing its value in relation to other currencies, including in particular the dollar. Furthermore, the government might have difficulty in selling its bond to borrow. It is trying to use syndicates for this purpose. As the Chancellor announced plans to sell "220 billion government bonds (known as gilts) to plug the hole in public finances (as revealed in the budget), the price of gilts fell sharply pushing their yield (or interest paid) upward to 3.51%. Investors are demanding a higher rate of interest for lending money to the government, fearing that these bonds would become less valuable in future. The investors are starting to have doubts about the credit-worthiness of the government. The price paid to insure UK debt against default is now more expensive than that of Spain - traditionally a country with worse finances. If the credit-rating agencies were to downgrade the UK (owing to the glut of government bonds in the market), that could add billions of pounds to public borrowing costs.
In May 2009, Standard & Poor's, the world's most renowned credit rating agency, warned that the UK's top-tier credit rating could be downgraded from AAA (which started in 1978) to an AA rating unless the leading political parties pledge in the next election to reduce the national debt (currently £754 billion amounting to 53.2% of GDP) with significant cuts in public spending and/or tax increases. Such a move could trigger an exodus of investment from the country as many currency managers are obliged to hold only a limited porfolio non-AAA sovereign investments, in addition to pushing up the borrowing costs as investors would demand a greater rate of return for holding British debt. The credit rating agency's view is based on its assessment that the UK national debt could reach 100% of GDP by 2013 - a level that would be incompatiable with an AAA rating. In part, this is due to S&P's view of the impact of the banking bail-outs on public finances. It calculated that the amount of taxpayers' money pumped into the system (£100 billion to £145 billion - up to 10% of GDP) would simply be lost (The Daily Telegraph, 22 May 2009). Loss of AAA status occurred to Japan in 1998 (and to Norway in 1987, Finland in 1990, Sweden in 1991, Canada in 1994 and to Spain and Ireland in 2009) but at that time, Japan had a huge current account surplus, strong currency and was the world's top creditor with more than $1.5 trillion of net foreign assets (now $3 trillion). Therefore, while Japan was able to withstand the pressure resulting from the loss of AAA status, the UK is a deficit country with weakening sterling. The fact that the US debt problem is no better than that of the UK should not be taken as a reassurance. The US economy is much larger and stronger than that of the UK to be able to withstand such pressure. Global currency reserves are 59% in dollar, 31% in euro, 5.5% in pounds and 2% in yen. Exodus of investment is less likely from the USA than from the UK.
Another consequence could be that the Bank of England would have to print money to fund the public deficit, expanding quantitative easing. One analyst said, "Even before the budget, we thought that quantitative easing purchases would be between £300bn and £400bn because of how bad the economy is going to be". The same anlyst said, "If the Bank of England takes it eye off inflation and puts its eye on absorbing supply of government bonds, investors will expect inflation to go to the moon" (The Guardian, 24 April 2009, p.14). This shows how serious the possible impact of the current government policy on the matter might be on inflation.
Actions of the UK and US Governments to Deal with the Crisis
The British Government has come up with a plan to fight economic recession, comprising £500 billion rescue packages, £37 billion bail-outs, assuming responsibility for £260 billion worth of risky assets, £75 billion in ‘quantitative easing’ (in effect, the printing of money), and £20 billion stimulus packages as against the existence of the £44 billion physical cash in circulation. A major part of the government programme includes bailing out the banks which, owing to the difficulties experienced in the US, are not performing the function of lending money to the public. The government intervention in relation to the banks has been carried out in the following ways: (i) nationalisation, as in the case of Northern Rock (nationalised on 18 February 2008) and Bradford & Bingley (nationalised on 29 September 2008). It also applies to 70% of the Royal Bank of Scotland (RBS) and 70% of Lloyds-HBOS. It cost £12.9 billion to bail out Northern Rock. The government now owns £113 billion of its liabilities as well as its assets. The ownership of assets and liability for deposits also apply to Bradford & Bingley. (ii) Purchase of shares in a bank, thus adding value to its shares and guaranteeing its assets. The government fund thus invested is now subject to stock exchange fluctuations. (iii) Insurance. In this case, banks pay a premium to the government. The government undertakes to assume the large losses that the banks might incur. In theory, there is no net cost to the government, but in practice, if the banks were to incur large losses (e.g. up to £325 billion in the case of RBS and up to £260 billion in the case of Lloyds), this might involve a substantial liability on such undertakings.
The expression ‘bail-outs’ includes all the above methods. Starting with the payment of £4.4 billion to Northern Rock in September 2007, the injection of promised capital into RBS and Lloyds, £5 billion compensating depositors in Bradford & Bingley and the Icelandic banks, and the loan to the Financial Services Commission, it is estimated that the government would have to raise around £90 billion in 2009 (Aida Edemarium, “The Incredible Shrinking Economy” in the Guardian, 1 April 2009).
In this matter, the power of the European Commission to intervene while the national governments pursue their policy of supporting the banking sector or other financial institutions ought to be borne in mind. Thus under Article 87(1) of the EU Treaty, subject to the exceptions provided in the Treaty, any aid granted by a Member State of the European Union or through State resources which distorts competition is liable to be regarded as incompatiable with the common market. Thus taking a shareholding in a private company, providing loans to it, injecting capital into its enterprise, thereby gaining a controlling interest in the firm etc. to implement a restructuring plan in the operation of the company have been held to be so incompatible [Case 323/82, Intermills SA v. Commission (1984) ECR 3809]. Article 87(2) lists three types of aid which are deemed to be compatiable with the common market: (i) aid having a social character, (ii) aid to make good damage caused by natural disasters or exceptional circumstances, (iii) aid making provision for the special position of Germany resulting from the division of the country. Aid relating to regional development is deemed to be compatiable with the common market under Article 87(3) of the Treaty (aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious under-employment. However, the Commission has taken the view, upheld by the European Court, that seriousness of the regional problem must be judged in a Community and not in a national context [Case 730/79, Philip Morris Holland BV v. Commission (1980) ECR 2671. The Commission's published guidelines for deciding upon the relative development of different regions as compared to the Community average (Guidelines on National Regional Aid 1998, OJ C74/6 para 3.5) is illustrated by this case].
The European Commission has the task of monitoring state aid. Article 88 of the Treaty has established a two-stage procedure for this purpose. Stage one concerns prior notification of any plan to grant aid and preliminary investigation as provided for in Article 88(3). Stage 2 of the investigative process comes into play where the Commission has not been able to indicate its approval of the state aid proposal under Article 88(3). Thus Article 88(2) provides that "[i]f after giving notice to the parties concerned to submit their comments, the Commission finds that aid granted by a State or through State resources is not compatiable with the common market ... it shall decide that the State concerned shall abolish or alter such aid within a period of time to be determined by the Commission".
If the State concerned does not comply within the prescribed time, the Commission or any other interested State may "refer the matter to the Court of Justice direct".
On 23 July 2009, the European Commission issued new guidelines on state aid supporting banks. They have just five years to wean themselves off state aid. If they are unable to survive on their own, they will be closed down as with other industrial sectors such as shipbuilding. The rules also raised competition remedies to prevent distortion in the market, such as branch sales and asset disposals. The guidelines are supposed to be based on three principles: that banks in receipt of help must be given a viable future without further support; that they must pay some of the restructuring costs; that measures must be taken to limit distortion of competition (The Daily Telegraph, 24 July 2009, p. B1)
The competition remedies here refer to the power of the European Commission to issue (i) a suspension injunction under Article 11(1) of the EU Treaty requiring the State to suspend the aid pending its decision as to whether it is compatible with the common market and (ii) a recovery injunction under Article 11(2) of the EU Treaty requiring the State to recover the aid from the beneficiary. The latter could be issued either before or after the Commission decision that the aid was unlawful as being incompatible with the common market. Non-compliance with either type of injunction can lead to an action before the European Court of Justice (Article 12 of the EU Treaty). In addition, the national court has a role to play in this matter. Where the national court is enforcing Article 88(3) of the Treaty (because the state aid was not notified to the Commission), it can rule the aid to be illegal, although it cannot rule on the incompatibility of the aid with the common market, this being the matter for the Commission to decide [Case C-354/90, Federation Nationale etc. v. France (1991) ECR1-5505]. This is because the duty of the State not to implement the aid before notification to the Commission is, to quote EU law jargon, "directly effective" giving individuals a legal right to invoke it [Case C-295/97, Industrie Aeronautiche etc.v International Factors SpA (1999) ECR I-3735].
The US Government mounted a similar rescue plan by launching a $700 billion bail-out plan. In fact, the total value of the rescue programme across various government agencies now (April 2009) exceeds $4 trillion. A congressional panel (chaired by Professor Elizabeth Warren) questioned in its report (April 2009) whether this would be enough to rescue the economy, should the recession worsen. The report added that the toxic assets remain key to the rescue programme, stating that “the Treasury approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of the troubled assets accurately reflects their worth”. The report cautioned: “If the economic crisis is deeper than anticipated, it is possible that the Treasury will need to take very different actions” (Daily Telegraph, 9 April 2009, p. B2).
Evaluation of Governmental Actions on the Financial Crisis
Considering the amount of money involved in the actions discussed above, the financial resources of the government, comprising mainly taxpayers’ money cannot possibly pay for these expenditures. Furthermore, tax revenues from the financial sector, including banks etc., in the United Kingdom over the 2009/2010 financial year is expected to drop by £28 billion. This estimate is based on a survey by the Centre for Economics and Business Research. As business companies go bankrupt and unemployment rises, causing the social security bill to grow accordingly, the national debt is estimated to increase to around £1.5 trillion within the next five years, according to the figures from Capital Economics. For these reasons, the government has resorted to the following measures to pay for the costs of reflating the economy. First, the government is borrowing money by issuing bonds using taxpayers’ money (which is falling dramatically owing to rising unemployment and the financial crisis affecting corporate institutions, including the banks themselves) as a guarantee that the debt will be paid back with interest. The bonds are purchased by various institutions such as UK pension funds (such pension funds are subject to stock exchange fluctuations - £418 billion in May 2009 while £550 billion in September 2007), insurance companies, UK banks and foreign investors, such as China and oil-exporting Arab countries, particularly Saudi Arabia). In fact, foreign investors buy well over a third of the bonds in issue. The question arises as to whether these investors will buy the bonds when they see that the government does not have enough money to repay the debt with interest.
The second is the device called ‘quantitative easing’, which effectively amounts to the printing of money, without the backing of governmental financial resources. The government issues bonds to the Bank of England which prints money for circulation in the economy. Historically, this device has proved to be the most frightening experience. In Germany, under the Weimar Constitution, such a measure resulted in hyper-inflation, widely accepted as a key factor in the rise of the Third Reich that brought about the Second World War and all that occurred during it. The reader is referred to the paragraph headed ‘fiscal equalisation’ in this author’s website article entitled “A Peaceful Resolution of the Israeli-Palestinian Conflict” on this issue. According to press reports in April 2009, the Bank of England, while lowering the rate of interest to 0.5%, decided to proceed with its earlier decision to buy £75 billion worth of bonds. In fact, there was an indication that the Bank of England might double the amount of printing money using this device (Daily Telegraph, 9 April 2009, p. B1).
The government and the Bank of England ought to be aware of the risk of hyper-inflation. Even in the midst of a recession, the spectre of inflation with regard to the price of basic commodities is not very far at the present time. Accordingly, the % change of the prices in the UK over the previous twelve months was reported (in the Independent of 25 March 2009) as follows:
Fuel/electric: +22.3; food: +11.3; fares/travel costs: +8.4; alcoholic drink: +5.4; leisure services: +5.3; household goods: + 5.0; tobacco: +4.4; catering: +3.9; personal goods/services: 3.2; household services: +2.1; leisure goods: -3.6; clothing/footwear: -6.4; motoring expenditure: -7.5; housing: -9.5. The weak pound triggered hikes in the price of food, petrol and other imported items.
On 18 March 2009, the USA followed the Bank of England’s lead and took up the strategy of printing money. It was reported that the US Federal Reserve would buy up to $300 billion (£214 billion) of Treasury bonds over the next six months (Times, 19 March 2009).
Owing to globalisation, inflation or hyper-inflation in the major economies (such as those of the USA and the UK) is likely to spread to other national economies of the world through export/import trade and their consequences being repeated there. Foreign investors (including China and the oil-exporting Arab countries) might find that the value of their investments was being eroded by such inflation. As a result they might withdraw their funds from the City of London and the USA, thereby accelerating the latter's economic decline. Alternatively, countries importing goods and services from the countries suffering from inflation might raise trade barriers to protect themselves from the effect of such inflation. Consequently, the growth of international trade which is essential to deal with the global financial crisis and recession will be hampered.
Criticisms of Governmental Actions in Dealing with the Crisis
A. Stimulus
The response of both the US and UK governments (and the rest of the world in varying degrees) has been to cut taxes, interest rates, increase spending and to borrow money for these purposes. However, a difference of opinion has appeared between Germany on the one hand and the US and UK on the other. For the Americans and the British, the experience of the Great Depression of the 1930s has been the decisive factor in shaping their policies. They want to spend their way out of the recession, irrespective of whether they can afford it or not. For Germany, on the other hand, the memory of hyper-inflation of 1923 under the Weimar Constitution has been the most important motivating factor in influencing that government’s approach on this matter. This author is inclined to agree with the views of the German Government on this point. For the reasons given above, the world needs to take every step to avoid the experience of the Second World War and what preceded it. Therefore, the British and US governments, and the rest of the world, ought to be careful about their plans to reflate their economies. They should not act on the view that they can borrow and spend any amount of money, as though the sky is the limit, even though they cannot match their income with their expenses. The consequences might be too fearful to contemplate. Balanced public finance is too important to be ignored.
B. Public Funds for Banks and Private Companies
Here the government policy (particularly that of the British Government) is seriously mistaken. In fact, it is based upon muddled thinking. Economic recovery comes through savings, capital accumulation and sound investment by private enterprises, and not through cash subsidies given to them out of the taxpayers’ money. In fact, such a cash subsidy has a demoralising effect on private enterprises. If private enterprises receive large public subsidies, they lose their incentive to make sound investment decisions, earn profit and avoid losses, expecting the government to bail them out whenever they might incur loss. Instead of operating on the basis of loss and profit, they would dismiss thousands of their own employees of lower ranks, and pay exceptionally high salaries, bonuses and retirement pensions to their executives. Currently (2008-2009), the press and the media in the UK and the US are full of real-life stories of this sort.
The muddled thinking referred to above is reflected in the fact that such subsidies from public funds are given to lenders such as banks and producers of goods, and not to the borrowers and consumers. We may cite the example of a car factory receiving money from such funds. If a car manufacturer receives such funds, it can produce more cars, thereby adding to its unsold stock. That does not help regenerate the economy. If the money is given to potential buyers, they will buy new cars, thereby providing a boost to the economy. This is happening in Germany already. There the government (April 2009) dramatically boosted its scrappage incentive scheme, more than trebling the cash on offer for owners of older vehicles to scrap them and buy new ones. The government will now (April 2009) make 5 billion Euro (£4.5 billion) available, after initially setting aside £1.5 billion Euro. The boost means that two million customers can take part in the scheme, which offers 2500 Euro for every scrapped car. More than one million customers have already applied for the scheme. The government scheme has had a dramatic impact on car sales within the market, rising 40% in March 2009. France, which has a slightly less generous scheme, recorded an 8% jump in March 2009. In the UK, which had not introduced the car scrappage scheme at that time, sales fell by 30% during the same period (March 2009) (The Times, 9 April 2009, p. 35).
The scrappage scheme was introduced in the United Kingdom in May 2009. Under the scheme, motorists who traded in a car more than 10 years old could obtain a £2000 discount on a new model. The government promised to put up half the discount but required car producers to provide the rest, whereas the schemes in Europe had been entirely state-funded. The scheme proved very popular with customers. It has produced more than 100,000 orders for new cars. As a result, government funding for the scheme (£300 million) was expected to run out by October 2009, six months before the scheduled time-limit. During the following month (June 2009) after the introduction of the scheme, 176,264 cars were sold, almost a tenth of which were under the scrappage scheme. These figures (produced by the Society of Motor Manufacturers and Traders in the United Kingdom) demonstrated the impact of financial incentives provided by the government to buyers/consumers (as opposed to government funding to producers, bankers, lenders etc.) on the possible regeneration of the economy. However, car manufacturers and traders feared a sales crisis when scrappage scheme would end (The Guardian, 7 July 2009).
Similar schemes could be introduced for other products (the reader is referred to the article “Abwrackprämie auf alles”, published in Spiegel Online on 11 April 2009, on this point), including industrial products, perhaps diverting funds from lenders and producers who might be using the money for corrupt practices, as mentioned earlier. This might have an enormous impact on the economy for its reflation. In fact, manufacturers and dealers are desperately seeking such schemes to be introduced in the UK.
C. Measures to Achieve Balanced Public Finances Must Be Based on a Strategy to Regenerate the Economy
This author has emphasised the importance of securing balanced public finances within the national economy but the programme articulated in this work clearly demonstrates that the aim ought to be to achieve sound economic growth both nationally and globally. Within the national economies, both the public sector and private sector must play their part. Regeneration of national economies would only be possible within the framework of international agreements providing for growth in trade globally between the West and Russia on the one hand, and the third world countries on the other. Perception of this strategy is not particularly evident at the present time (summer of 2010). The G20 Summit of June 2010 (held in Toronto in Canada) pledged to halve the budget deficit, yet no concrete programme for promotion of international trade emerged. The Toronto G20 Summit also agreed that in future, banks should keep enough capital on their balance sheets to have withstood the aftermath of the Lehman Brothers collapse in 2008. In the case of Britain, the banks will have to bolster their balance sheets permanently by as much as £130 billion. The consequences for the economy of Britain and other countries are likely to be serious. The banks will have less money to lend to business and industry, as they will have to divert cash towards strengthening their balance sheets (Daily Telegraph, June 28, 2010, p. B1).
In June 2010, the coalition government of the United Kingdom presented its emergency budget to Parliament proposing cuts in public expenditure and tax rises amounting to £113 billion. As a result, a million jobs in the public sector alone are under threat (Daily Telegraph, June 23, 2010, p.6). Welfare benefits including child benefit, job seekers' allowance, incapacity benefits, education, health service, and even police, courts and prison services, are being targeted for cuts. Every public project including capital projects is being scaled back. MASSIVE UNEMPLOYMENT CAUSED BY SUCH CUTS RESULTING IN LOSS OF GOVERNMENT REVENUES AND RISE IN UNEMPLOYMENT BENEFITS AND OTHER CONSEQUENCES ARE LIKELY TO RENDER THE GOVERNMENT OBJECTIVE TO ELIMINATE BUDGET DEFICIT A FUTILE EXERCISE. The perception of the need to achieve sound economic growth does not seem to be present notwithstanding the Government's claim that its fiscal policy was designed to raise confidence in the private sector and therefore growth. The claim that confidence in private sector alone would bring about economic growth in spite of the cuts in public expenditure of the dimension involved seems to be untenable. The Government's role is enormous in the national economy amounting to 20% of employment and 50% of total spending (The Times, June 14, 2010, p.43). As a result, cuts in public spending have the effect of reducing incomes of private businesses and households. Consequently, effective demand for goods and services within the national economy will fall, thereby frustrating the prospect of economic growth. A similar approach (i.e. removal of the budget deficit through cuts in public expenditure, tax rises etc. without economic growth) is being pursued also in Europe, notably in Greece, Spain, Portugal, Italy and Germany. The consequences are likely to be similar.
This shows that the need for the development of a strategy for economic growth both nationally and globally is called for. The reader is referred to the summary of recommendations in this website article. In fact a pattern of international trade is already appearing. China and Taiwan have entered into trade agreements (in June 2010) to abolish tariff on hundreds of products, thereby increasing trade between these two countries worth billions of dollars. This pattern of international trade ought to extend to other parts of the world, particularly between the West on the one hand and the third world and developing countries on the other. This should be particularly helpful at a time when Europe and the USA are suffering from budget deficits and economic crisis. Certain developing nations such as China, India and Brazil (in addition to the wealthy Arab countries) are already emerging as major economic powers able to create and invest capital for industrial development, and to trade profitably with the West and Russia. This creates the appropriate economic climate for a rapid growth of international trade, which in turn provides the essential condition for the regeneration of the national economies of the West.
Promotion of International Trade
The measures recommended above within the national economies should be coupled with vigorous international trade involving both export and import trade from each of the counties of the developed and underdeveloped countries. The third-world countries potentially have substantial consumer capacity to create a much larger market for the goods imported from developed countries. However, this system must involve two-way traffic; underdeveloped countries must be able to export their products in order to be able to import from developed nations. If their economies are sufficiently developed (aided by developed countries), that is likely to provide a strong boost to the global recovery. A Marshall Plan for third-world countries seems to be the answer to the current global crisis. This problem is likely to be resolved by enhancing the consumer capacity of the larger section of the world’s population. The importance of the matter is emphasised by the fact that world trade is presently (2009) facing an emergency. The OECD predicted that world trade would shrink by 13.2% in 2009. In their meeting in London on 2 April 2009, the leaders of the Group of Twenty (G20) acknowledged this by (a) supporting a new Special Drawing Right (SDR) allocation of $250 billion, and (b) committing $250 billion of support for trade finance.
Conclusions
The following are recommended as appropriate measures for dealing with the global financial crisis:
1. Employment opportunities ought to be created in the public sector in the same way as under the New Deal measures of the 1930s in the US.
2. The goal of a balanced budget and balance public finance (balance between governmental income and expenditure) ought to be pursued within each national economy.
3. The size of public debt ought to be progressively reduced within the national economies.
4. The practice of ‘quantitative easing’ (creating of money) ought to be kept to an absolute minimum, and altogether avoided wherever possible.
5. Subsidy by way of public funds to banks and private companies should be progressively diminished and eliminated altogether. This has a demoralising effect on the financial institutions, including banks in the private sector.
6. The government ought to provide financial incentives to private borrowers, buyers and consumers. This is illustrated by the car scrappage incentive scheme in Germany. Such a scheme may be extended to other industrial products and consumer goods generally. The strategy is to enhance the purchasing power of consumers, thereby boosting the productive capacity of the national economy. This ought to have the effect of raising the level of employment and government income (taxes), and of reducing public expenditure on welfare benefits on the unemployed. Funds should be diverted from subsidies to banks and private companies to this scheme. It is submitted that expenditure on raising public consumption capacity should form the heart of the national government’s programme of dealing with the economic crisis. In this way, once consumers’ purchasing power has been boosted, people will be able to meet their mortgage repayments. The so-called toxic assets will no longer remain toxic. Banks will be able to recover their assets from their clients. This is how the banking sector should be revived. It is in this way, and not through public subsidies from the government, that banks and other financial institutions operating commercially can be regenerated. Banks have never developed and flourished from taxpayers’ money. If they run their business successfully with their clients commercially, they will flourish. Cash injections by the government using taxpayers’ money would be detrimental to their successful commercial operation. Government subsidies are liable to lead to corrupt practices and lack of commercial incentives to operate their businesses. Public funds should be withdrawn from them and diverted towards giving consumers incentives to buy goods and services produced by manufacturers and traders. It will be far easier to regenerate the economy in the prevalent climate of lower interest rates, lower taxes and lower energy prices.
7. The above national measures should be coupled with vigorous international trade in import and export by each of the countries of the developed and underdeveloped world. A Marshall Plan for the development of third-world nations ought to be adopted for this purpose.
In fact, a national economy cannot be regenerated, no matter how positive its domestic policy might be, without a substantial boost to international trade. This is demonstrated by what has happened in Germany. We have seen that the introduction of a car scrappage incentive scheme had the effect of a significant increase in the sale of cars in Germany. Yet the German economy contracted by 3.8% during the first quarter of 2009 owing to the fall in demand for manufactured goods coupled with a strong Euro. The annual rate of contraction of the Eurozone economy as a whole stood at 4.6% during the same period. THE CONTRACTION OF THE GERMAN ECONOMY WAS DUE TO A SUBSTANTIAL LOSS OF EXPORT TRADE. This demonstrates the importance of vigorous international trade for the regeneration of national economies. Pursuit of domestic national policies alone, in isolation from international trade and a global strategy for the development of third world countries and enhancement of their consumption capacity, would not be sufficient.
The social consequences are becoming obvious as the economic downturn continues (and one does not know at this point of time what the political consequences could be). In the United Kingdom, home repossessions by the banks and building societies for failure to make mortgage repayments by those who have lost their jobs and businesses increased by more than 50% between January and March 2009. Nearly 66,000 families have lost their homes since the credit crunch began (The Times, 16 May 2009, p.57).
The developments in Europe during 2014-15 have reinforced the analysis and conclusions of this website article. Rapid economic downturn in various countries of Europe including Spain and Italy is threatening political stability in the countries concerned. The theme of this article has been that economic growth is the way to achieve prosperity. The route to economic growth can be brought by the growth of international trade not only between the East and the West within Europe, but also between the West and the Third World countries, particularly in Asia and Africa. However the political tensions between Russia and the West particularly over the crisis in Ukraine have virtually brought about the collapse of trade between Russia and the west of Europe. The West has applied economic sanctions against Russia over Ukraine. That in turn has brought about the economic downturn, massive unemployment and the political protests that are taking place in Western Europe. The economic sanctions imposed by the West on Russia over the Ukraine is an utterly misconceived approach.
This author had advocated the thesis in his website article entitled "How to Avoid Nuclear War Between Russia and the West" that Russia and the West each had its own 'sphere of influence'. According to this doctrine (an emanation from the US Monroe doctrine), the West and Russian ought to respect each other's sphere of influence. The breach of the doctrine in 1962 by the Soviet Union over Cuba nearly plunged the world into a nuclear war. Fortunately, on that occasion, the Soviet Union refrained from arming Cuba with deadly ballistic missiles which had brought the American cities within the range of Russian missiles. Eventually, Soviet warships carrying these missiles turned back from approaching Cuba. The US had reacted very sharply by threatening nuclear bombardment of the Soviet Union because the West does stand by the doctrine of the sphere of influence when its security is threatened by Russia. However, the West is not observing the same doctrine against Russia over Ukraine. Virtually the whole Eastern Europe, including Poland and Ukraine, was within the Russian sphere of influence. In fact, the West had nearly abandoned the sphere of influence doctrine as against Russia over Eastern Europe. To be consistent with this approach, would the West permit Russia to rearm Cuba in 2015 against the US? The answer would certainly be no. This shows that the West is following an opportunistic approach vis-à-vis Russia. Ukraine has largely been within the Russian sphere of influence since the Second World War, yet the West has imposed economic sanctions against Russia over the Ukraine. This in turn has brought about the economic crisis in Western Europe, giving rise to massive political protests in various countries in Western European. This author would strongly recommend that the West withdraw these sanctions and resume international trade with Russia. This should have the effect of reviving economic growth and higher employment in the whole of Europe. This coupled with higher international trade in the world as a whole, including third world countries, is the way forward to revive prosperity for all and avoid a third world war with nuclear weapons.
According to recent press reports in June 2015, Russia has threatened Poland and Romania with rocket strikes for installing US missile defence systems. The US is planning to put 1000 military vehicles into Estonia, Latvia, Lithuania, Bulgaria, Poland and Romania (The Times, 25 June 2015). Russia is to procure 40 new intercontinental ballistic missiles to add to its 1582 strategic warheads deployed on 515 missiles and bombers, while the US has 1597 deployed on 785 (The Guardian, 25 June 2015). The conflict has arisen over Ukraine, which has historically been within the Russian sphere of influence.
By contrast, the approach I am advocating in this article is that there should be cooperation and collaboration between Russia and Western Europe for the development of trade. Sanctions against Russia should be withdrawn and trade ought to be promoted between the countries of Europe and between Russia, the West and third-world nations. As a result, economic prosperity ought to flourish.
Instead the West is pursuing a policy of conflict with Russia over Ukraine, with the risk of plunging the world into nuclear war. This is a misconceived policy and is dangerous. Both the West and Russia ought to pursue a positive and constructive policy as advocated in this article. The Western policy of annexing the Russian sphere of influence ought to be abandoned.
