[Viewpoint] Austerity at the wrong timeThe world economy is starting to resemble a “Perils of Pauline” type serial. Political leaders of the world’s major economies - the United States and the European Union - played out separate nail-biting games of brinkmanship over the U.S. federal debt and the European default crisis. They reached last-minute deals in high moments of drama. In a serial, each episode usually ends at a turning point to keep the audience excited about seeing the next episode - and so it was with the economy.
The pols hurriedly threw together a makeshift compromise to avert immediate dangers, but they also escalated suspense over what would come next. And what came next was another couple of bombshells. The U.S. was hit with a downgrade in the credit rating for its sovereign debt. Meanwhile, the EU, which half-heartedly agreed to bail out Greece, is now mutely watching the credit disaster creep in from periphery countries and spread to key members like Spain, Italy and France.
Against this backdrop, the fear of a double dip, or second recession, in the U.S. economy looms over the world. Equity markets across the globe are roiling amid jitters that the global economy could be headed for another recession after the feeble recovery from the 2008 financial crisis. The instability on both sides of the Atlantic turned into an earthquake, producing a market tsunami that has hit Korea, despite our reasonable level of government debt and solid economic fundamentals. Investors around the world are reacting to even minor news about sovereign debts and possible recession, sending the markets on a roller coaster ride.
Stock prices tumbled on forecasts of a prolonged slowdown and then surged when the U.S. Federal Reserve pledged to keep interest rates at near-zero levels for at least two more years. Economic pundits and analysts unleashed mixed outlooks, aggravating anxieties in the market. Lack of political will and leadership from the U.S. and Europe added to the gloom. With such disarray, we can hardly expect a logical or just outcome. If such immature and disgraceful performances by politicians and leaders continue, the drama playing out in the world economy could end up as a tragedy.
But there is hope.
The pessimists’ argument is that the U.S. economy has failed to really recover despite heavy spending and stimulus measures. They believe the economy will inevitably lose even more steam given its current debt levels and inflation risks. In order to restore its creditworthiness, the U.S. will have to shift to fiscal tightening and austerity measures in order to reduce its deficit. With spending reduced, the U.S. economy will fall into a recession, bringing the global economy along with it.
But forewarned is forearmed. If the economy is evidently headed for a recession, authorities should do their utmost to dodge the dangers. The world economy has never fully turned the corner after the 2008 financial meltdown, as the recovery was mostly led by emerging economies. Unemployment rates in the U.S. and Europe remain sky-high. A boost in jobs and income would spur spending and revive the economy, but that has not happened. Families muddled through and kept consumption to minimum with their incomes mostly going to pay off debt. The advanced economies have been running mostly on government spending and easy interest rates. Government debt increased in the process, but it is not the main cause of the economic doldrums.
If preventing a recession and reviving the global economy is the task at hand, state leaders should come up with appropriate action plans and implement them as quickly as possible. Austerity will do more harm than good under current circumstances. In the long run, governments must reduce debt and deficits, but cutting spending in a slowdown could kill the economy altogether.
If the economy actually freezes over, more people will be without jobs and they will spend less. If growth slows or contracts, consumers, corporations and the government would lose the ability to service their debts. Growth is essential to ensure creditworthiness. Otherwise the textbook recipe for disaster - tightening, recession, increased deficit and debt - will continue to hobble the global economy. Korea recuperated quickly from the 1997-98 financial crisis because it did the opposite of the International Monetary Fund’s prescription of fiscal tightening and high interest rates.
The world must reinforce a growth base for the global economy. Leaders must cooperate to fight today’s crisis as they did in 2008.
*The writer is an editorial writer of the JoongAng Ilbo.
By Kim Jong-soo