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U.S., European Austerity Will Doom Global Economy: U.N. Study

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A U.N. economic think tank slammed the current approach to solving the global financial crisis in a report released Tuesday, saying current austerity policies and market-pleasing moves, along with financial deregulation, will bring the global economy to its knees, with the best-case scenario a decade of stagnation.

The U.N. Conference on Trade and Development’s report, titled “Post-Crisis Policy Challenges in the World Economy,” called instead for reregulation of financial markets to include managed exchange rates, separation of investment and commercial banking, wage increases, and abandonment of market-led actions.

UNCTAD Secretary-General Supachai Panitchpakdi said in the report’s overview, “Those who support fiscal tightening argue that it is indispensable for restoring the confidence of financial markets, which is perceived as key to economic recovery. This is despite the almost universal recognition that the crisis was the result of financial market failure in the first place. It suggests that little has been learned about placing too much confidence in the judgment of financial market participants, including rating agencies, concerning the macroeconomic situation and the appropriateness of macroeconomic policies.”

He continued, “In light of the irresponsible behavior of many private financial market actors in the run-up to the crisis, and costly government intervention to prevent the collapse of the financial system, it is surprising that a large segment of public opinion and many policymakers are once again putting their trust in those same institutions to judge what constitutes correct macroeconomic management and sound public finances.”

A reversal of lowered income expectations for the average household, he said, and resumption of policies that emphasize mass income growth in both rich and poor countries as the basis for sustainable development, were both essential; otherwise, “all other attempts to regain growth momentum will be in vain.”

Supachai, a former head of the World Trade Organization, also said that austerity measures, “as the main means of tackling the euro crisis without regard for regional domestic demand growth, may backfire badly.”

Heiner Flassbeck, lead author of the report, head of the globalization and development strategies division at UNCTAD and a former deputy finance minister in Germany, said at a news conference, “If interest 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.”


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