23-24 January 2012
REDEFINING MARKETS IN A DEMOCRACY AND OVERCOMING THE CRISIS
WITH GROWTH IN THE REAL ECONOMY
A. Current global economic environment
External, fiscal and financial imbalances aggravated by the global crisis of 2008 and the severe recession in 2009 characterise the current state of the international economy. Growth in the global economy is predicted to slow again in 2012 to 3.3% (from 5.2% in 2010 and around 3.8% in 2011), reduced from a forecast of 4.1% in September 2011. Declining growth is a predictable consequence of a flawed economic policy framework and ineffective institutions.
Three years after the recent global financial crisis, it is more than evident that the economic problems have not improved, but rather became deeper.
We continue to face very important and urgent challenges that put at risk not only growth but also social cohesion. In the euro area the debt crisis has not been resolved and increased financial volatility creates growing insecurity. As at the moment the majority of EU countries have conservative governments, their only answer to the debt crisis has been to call for creating more fiscal discipline.
Up to now, efforts to achieve fiscal consolidation and limit speculative attacks have not succeeded in boosting investment and growth and have reduced private consumption. Uncertainties become more acute concerning the possible market reactions against European sovereign bonds but also concerning citizens' reactions in countries that undergo austerity programs without a visible prospect of improvement of the real economy.
Growth expectations seem better in the US for 2012, although structural problems make economic recovery slower. There are also signs of an economic slowdown in emerging markets particularly in industrial production. Although South America has not been at the heart of the crisis, the problem of high levels of inequality remains acute. The financial crisis has influenced development assistance in a negative way, slowing down the implementation of the Millennium Development Goals
At the global level, the banking system has not been truly fixed as problems of excessive leverage, unrestricted risk taking and lack of transparency still persist. As a consequence states, companies and individuals have more difficulties in finding necessary loans. Commodity prices remain high due to several factors but could also be affected further by supply shocks.
Because of the combination of the above factors the current state of the global economy has deep social and political repercussions. It creates not only further risks of high levels of unemployment, especially for young people and women, but it puts at risk social acquis and nurtures populism on all sides of the political spectrum.
Unregulated financial globalisation creates unpredictable and unidentified actors that are sometimes stronger than individual states. The damaging influence of ratings agencies must be limited, at a moment when many governments are struggling with the consequences of crippling sovereign debt. These unaccountable bodies can destabilise even sound economies and limit the scope for action of elected governments and existing transnational institutions. This direct threat to democracy is something we must address urgently. Consequently, we socialists and social democrats must take coordinated action for the regulation of the global financial system.
B. Priorities for a Progressive Plan for Action
1. Redesign global financial institutions for crisis prevention and management
The SI Commission for Global Financial Issues has repeatedly underlined the importance of restructuring the Global Financial Architecture. Failures in risk management and financial supervision were integral parts of the 2008 crisis.
To achieve this, it is of utmost importance to redesign multilateral institutions in order to improve crisis prevention and resolution. We need to build consensus for the adoption of necessary instruments that could help mitigate the impact of future crises.
2. Regulation of the financial sector to prevent speculative attacks
Effective regulation of the financial sector is the only way to prevent crises due to speculative attacks. Speculative attacks threaten economic recovery and social cohesion. Citizens around the world reject the current speculatory nature of the global financial system responsible for creating the bubble that burst in 2008.
Progress has been made in enhancing the regulation of banks and financial institutions but not enough. Reinforcements are needed to restrict risk-taking and increase transparency. At the same time, central banks - who have the resources to prevent speculation in government debt granting - should have a more active and proactive role.
3. New instruments for development and sustainable growth
Governments’ ability to meet their obligations requires growth and new jobs. That is why we progressives have the task of promoting sustainable economic growth and employment.
To increase growth and sustainable development we should intensify our support for proposals of alternative financing, such as the Financial Transaction Tax. Recently, this idea, that our Commission proposed in 2008, has been adopted by the European Commission and was backed by Argentina, Brazil, South Africa and the African Union.
Alternative financing instruments such as the FTT would reduce speculation and at the same time provide a source of funding for structural reforms and development.
4. Addressing the eurozone crisis beyond austerity
Concerning the eurozone crisis, beyond the necessary steps for more coordinated fiscal consolidation, it has become clear that a solution can be shaped only if we go beyond austerity. At best austerity prevents the next crisis, but does not resolve the current one.
Austerity did not help to resolve the fiscal problem as much as expected because of a weakened economy resulting in lower tax revenues and increased expenditure. In these conditions, highly indebted countries will not be able to deal with debts, and growth will not come with austerity without further assistance. Equally, structural reforms cannot be the answer because they are a long term process, whereas today the problem is a lack of demand.
A bold approach based on solidarity is the only way to rescue the European project. The different options of Eurobonds should be seriously discussed as well as a different role for the European Central Bank. The ECB needs a more decisive role in supporting the financial market.
5. Increase competitiveness while defending social protection
Whilst labour market reform is discussed broadly in Europe and other countries to increase competitiveness, according to available data flexible labour markets in democracies have not performed better than economies with better systems of social protection.
Especially at these times of crisis, when the social acquis and the achievements of our fights for social justice and labour rights are under threat, social protection should be safeguarded and strengthened by establishing social protection floors adopted by each country.
6. Invest in green growth
At the same time, the global crisis offers an opportunity to pursue a green growth agenda that would allow a more efficient use of natural resources, compatible with environmental preservation while promoting job creation and supporting growth in the real economy.
The tangible outcomes of green growth targeting developing countries can offer more opportunities for fair and sustainable growth to the most vulnerable segments of our populations.