Three Important Statements on the Economic and Financial Crisis

There’s a lot to say about the current financial and economic crisis. When daily news on bankrupt European countries, US debt or increasing commodity prices are increasing global imbalances, it becomes more difficult to stay on top of things and make sound economic predictions. That’s why I’d like to share three recent intersting analyses:

Nouriel Roubini analyzes the problems of the PIIGS countries and explains why traditional political answers won’t work and the only solution lies in a restructuring of the debts of governments, households and banks:

“Greece is clearly insolvent. Even with a draconian austerity package, totaling 10% of GDP, its public debt would rise to 160% of GDP. Portugal – where growth has been stagnant for a decade – is experiencing a slow-motion fiscal train wreck that will lead to public-sector insolvency. In Ireland and Spain, transferring the banking system’s huge losses to the government’s balance sheet – on top of already-escalating public debt – will eventually lead to sovereign insolvency. (…)

If the PIIGS can’t inflate, grow, devalue, or save their way out of their problems, Plan A is either failing or is bound to fail. The only alternative is to shift quickly to Plan B – an orderly restructuring and reduction of the debts of these countries’ governments, households, and banks. This can happen in a number of ways. (…) Europe cannot afford to continue throwing money at the problem and praying that growth and time will bring salvation. (…) The creditors and bondholders who lent the money in the first place must carry their share of the burden, for the sake of the PIIGS, the EU, and their own bottom lines.”

Robert Skidelski explains how investors are betting on sovereign defaults and why this speculation is a big risk for democracy in Europe:

“The tension between democracy and finance is at the root of today’s rising discontent in Europe. Popular anger at budget cuts imposed at the behest of speculators and bankers has toppled leaders in Ireland and Portugal, and is forcing the Spanish prime minister into retirement.

Of course, there are other targets: Muslim immigrants, ethnic minorities, bankers’ bonuses, the European Commission, the ECB. Nationalist parties are gaining ground. (…) So far, none of this has shaken democracy, but when enough people become vexed at several things simultaneously, one has the makings of a toxic political brew. Nationalism is the classic expression of thwarted democracy.”

Finally, the Guardian criticizes that political decision-makers don’t act despite these dangers, the apparent mistakes during the crisis and the financial bubbles on commodity markets and compares this to the situation in 2006/07:

“Western policymakers did not have to base their economic strategies on unsustainable consumer booms; they did not have to deregulate financial markets so that the upward trend in commodity prices justified by economic fundamentals (the growth in the emerging world) has been accentuated by the use of derivatives to speculate in the futures markets. (…)

Clearly lessons have not been learned from the mistakes of the recent past. Commodities are the new asset-backed securities. The imbalances in the global economy are as glaring as they were in 2006 and early 2007. Financial markets have not been reformed and there is once again the assumption that things will all work out well in the end.”

Posted on May 17, 2011 in Democracy

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About the Author

Andreas Lindinger is a Vienna-based business consultant, sustainability expert and urban thinker passionate about livable cities, sustainable transportation, renewable energy and civic engagement. Andreas offers a transdisciplinary business, finance and sustainability background, industry expertise in energy, mobility and environmental consulting and broad international experience gained in Vienna, Vancouver, Berlin and Dublin. Make sure to also check out Vienncouver.com and to follow @lindinger on Twitter.

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