Global fiscal switch: The Greek shock waves have spread. The Spanish government has announced wage cuts. Gordon Brown has fallen. The UK’s new coalition government will pare spending. May 2010 is bringing to an end the “spend-to-mend” salvation that Brown preached to the world from late 2008. Government bond issuance has gone too high and must be cut back. That means austerity, especially in Europe. It’s going to be difficult, but the world economy should be able to take it.
Many economists echoed Brown’s call. The “paradox of thrift” is that saving is good — but not if everyone does it at once. Then you might have the enormity of depression.
But there was a problem with Brown’s spend-to-mend approach. Governments, not least his, had spent during the boom years. Now private investors are weighing whether governments have gone too far. What the European Union terms speculative attack is really a decision by investors no longer to buy the paper of almost bankrupt states.
The EU response has been to circle its economies. But the expensive wall will crumble if deficits are not curbed. Countries like Italy and even France will have to emulate Greek and Spanish austerity. Even those which have already taken measures such as Ireland need to do more. EU growth is already sluggish — only 0.2 per cent in the first quarter. In the euro-periphery and in the UK, there is now a risk that the essential cuts cause recession.
The bigger question is whether the world can take austerity, or whether depression lurks. The risks are great but there are grounds for optimism. Emerging markets are bolstering the world economy. Chinese domestic demand is now playing a big role. Imports were up by a staggering 49.7 per cent on a year earlier in April. Chinese consumers are becoming a global engine. So, too, are those of emerging Asia more generally. Their status symbol is the luxury car — made in Germany. The United States is the biggest debt-issuance offender but higher growth and reserve currency status give it more time to adjust than Europe. The Asia-US trade axis looks set to steer the world towards growth and away from depression — even as old Europe, sclerotic in spite of everything, tightens its belt painfully.