"Leading an austerity policy while everybody else is doing the same exposes to great dangers: reduced public spending, deflated income and unemployment reduce demand, hence economic activity, hence taxes "

Prof. Antoine Hyafil, Academic Dean of HEC Paris in Qatar

 

 

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Globalization was widely viewed as positive. Large populations were drawn out of poverty. Some frictions did occur in the West, but the apparition of a vast number of new customers seemed to more than compensate the adjustment costs.
Prof. Antoine Hyafil, Academic Dean of HEC Paris in Qatar has written this article published in Qatar Today.

Economic crisis

The economic crisis, started with the 2007 financial meltdown of US sub-primes, was a call back to reality: in the same way as the initial rebalancing, from East to West, involved exploitation of and impoverishment in the hitherto dominating economies, the modern rebalancing would involve suffering. Because of political fragmentation and of the existence of a great economic divide, the likelihood is high that Europe will be the great loser.

Buying power had been shifting for some time: pre 2007 growth in the West was no longer the natural outcome of increasing income of individual households. It hinged upon a rise in private indebtedness, in the United States and in several European countries, stimulated by public policies. The latter aimed at beefing up demand, while competition from emerging countries, combined with a move out of unionized industries into non unionized services, were exerting pressure on labor income. 

The burst of the sub-prime bubble could have brought a brutal adjustment of Western GDP. It did not. Substituting public debt to private debt mitigated the recession in the West, and allowed for growth to be maintained in the emerging world. There was no abrupt rebalancing but a continuation of the previous gradual pace.

Explosion of the monetary union

With the subprime crisis, and the ensuing substitution of public to private debt, the artificial character of the monetary union got suddenly exposed.

The path followed henceforth in Southern Europe is budgetary austerity and deflation of labor income, so as to restore industrial competitiveness and the ability to service public debt. This has come at the cost of a great social suffering, and with limited support from the North, with the latter also focusing on restoring fiscal equilibrium. Many question whether this was the right policy.

Leading an austerity policy while everybody else is doing the same exposes to great dangers: reduced public spending, deflated income and unemployment reduce demand, hence economic activity, hence taxes. More likely than not, this leads to a vicious circle, with an aggravated budget deficit. Letting Greece or others out of the Euro is likely to produce even greater damage.

Economists and politicians have advocated pooling, at least partially, European debt in the form of Eurobonds, and developing investment in infrastructures at the European level. Both policies would most likely have a positive impact, may be a hugely positive one. But both imply a transfer of sovereignty in fiscal matters to the European level. It seems this has become the vision behind the German call for discipline: it would help to more smoothly pilot the European economy into finding its place, probably a smaller one, into the great rebalancing currently happening. It is not sure this will happen without first incurring great amounts of suffering.