Share

UN study savages US, EU economic policies

Geneva - The pursuit of austerity measures and deficit cuts is pushing the world economy towards disaster in a misguided attempt to please global financial markets, the annual report of the economic thinktank the United Nations Conference on Trade and Development (Unctad) said on Tuesday.

The report, entitled Post-crisis policy challenges in the world economy, savaged US and European economic policies and called for wage increases, stricter regulation of financial markets - including a return to a system of managed exchange rates - and a conscious break with market-led thinking.

"The message here is very pragmatic: we need to reverse our course quickly," said Unctad secretary general Supachai Panitchpakdi.

Supachai, a former head of the World Trade Organisation, said the policy response to the crisis, with an emphasis on fiscal tightening, was misconceived and inept.

The report's lead author Heiner Flassbeck said the global economic situation was extremely dangerous and, without more stimulus, a decade of stagnation was the best-case scenario.

The current policies were a disaster, said Flassbeck, head of the globalisation and development strategies division at Unctad and a former German deputy finance minister.

"If interests rates everywhere are zero, and if governments stick to the policy of not only keeping fiscal deficits where they are but retrenching, cutting public expenditure, then we will end up in permanent recession," he said.

"Unemployment depends very much on demand. And if you have no demand then you need government to step in with a huge programme for stimulating the economy. This was the US scenario in the past. Now it's worse because wages are rising less than in the past, so you're going to need a bigger stimulus programme."

The recovery from the financial crisis was not only jobless, which was to be expected, but also "wageless", he said, with Americans, Japanese and Europeans - 70% of the world economy - expecting their incomes to stagnate.

In its last report a year ago, Unctad said a premature removal of stimulus policies might cause a deflationary spiral with attendant slumps in growth and employment around the world.

"Let's not fool ourselves. This is a realistic scenario for the whole developed world, if we do not understand the lessons now, and really quickly, because we do not have other instruments any more," Flassbeck told a news conference to launch this year's report.

"To revive the economy with a wageless recovery with diminished expectations by the private economy, by private households, what are the instruments at hand? There is nothing."

He said that even if things go well, global economic growth would slow to about 1.5% in 2012, less than half the UN forecast of 3.1% growth for this year.

Herd mentality

The report put much of the blame for the crisis on deregulation of financial markets, which it said invited destabilising "herd behaviour" by speculators, and allowed an over-concentration of banking activities.

"What we've seen in the past and we never learn is that countries seem to have excessive belief in the financial markets. And we've seen time and again that financial markets are not very sound in their judgement," said Supachai.

"But still people keep thinking that they are doing these austerity measures because they want to please the markets so that the markets give them better ratings, including the rating agencies which do not always produce the best assessment."

Flassbeck said the herd mentality was evident whenever equity markets and commodity markets all lurch in tandem on the same day, an effect that could not conceivably be caused by real swings in demand. But the world was ignoring it, he said.

"If the G20 negotiations were not confidential I would tell you that it's ignored even there," he said.

A November summit of the 20 biggest economies would reach "extremely weak" conclusions on tackling the crisis and underestimate the influence of financial markets, he said.

"We have three areas where the G20 wanted to be strong. The first is the coordination of economic policy: nothing. The second is commodities speculation: more or less nothing; and the third is international global monetary order: nothing. So that's the result of nine months deliberation by the G20."

The UN report said the world should introduce a system of rules-based floating exchange rates, which would kill off distorting "carry trades" in which investors borrow currencies with low interest rates to buy higher-yielding currencies.

The system would be based on divergences between the consumer prices or interest rates applicable to different currencies, and unlike the defunct Bretton Woods system would cater for continual adjustments in exchange rates.
We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.94
-0.0%
Rand - Pound
23.91
-0.0%
Rand - Euro
20.41
+0.1%
Rand - Aus dollar
12.33
+0.1%
Rand - Yen
0.13
-0.0%
Platinum
908.05
+1.2%
Palladium
1,014.94
0.0%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders